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SEBI proposal on distributors, Investment Advisors can trip mutual funds

SEBI proposal on distributors, Investment Advisors can trip mutual funds

Business from banks will be adversely impacted, advisors likely to go out of trade

by Mr. JOYDEEP GHOSH & ASHLEY COUTINHO

Business Standard,  4 Jan 2018

The Securities and Exchange Board of India’s (SEBI) renewed push to split the role of an investment adviser and distributor is causing a lot of heartburn in the 22 trillion mutual fund industry.

The industry, which has been riding high due to robust inflows of 50 billion a month from the systematic investment plan route could suddenly find itself in a situation when one of the prime contributors to the assets under management, banks, will be completely out of action.

“If the proposals are implemented, about 40% of inflows will be impacted as wealth management arms of banks will no longer be able to give advice on mutual funds,” said the CEO of a fund house.

“The latest proposals will also drive the bulk of the business towards the distribution side,” said Mr. Dhirendra Kumar, CEO, Value Research. Distribution per se is a straightforward business model wherein the distributor receives a certain commission, either trail or upfront.

The business model of independent financial advisors (IFAs) will also be adversely impacted and most could simply go out of business. Sandeep Parekh, founder, Finsec Law Advisors, said the market regulator’s move would actually the harm retail investors.
“If these

PROPOSALS

■ January 2018: Banks, NBFCs, corporates can not offer both advisory and distribution, either directly or through a subsidiary

■ IFAs can't give advice and distribute. Even immediate relative can not do it

■ June 2017: Corporate and banks were allowed to form separate entities / subsidiaries to offer advisory services

■ October 2016: Corporate and banks were allowed to offer investment advice through separate departments or divisions guidelines are implemented in this manner, the business of investment advice will no longer be lucrative.
So, only the richest will be able to secure investment advice, as it has happened in the UK where such a guideline exists. Retail investors will not receive any advice, which is harmful for them.” At present, there are about 1,00,000 mutual fund distributors with about 10,000 ones

IMPACT

■ Sales of insurance products would get a boost if new proposals are implemented.

■ In the absence of banks and institutions, inflows will be adversely impacted.

■ Pure advisory models will go out of business as compliance cost and investors' lack of willingness to pay will be hurt.

■ Hamper penetration of mutual funds in smaller cities where investors need handholding active, on industry estimates.

SEBI’s latest proposals also plan to disallow banks, non-banking financial companies (NBFCs), corporates, limited liability partnerships (LLPs) and firms that provide distribution services from providing investment advice, either directly or through a holding or subsidiary company.

This means that wealth management arms of banks, one of the big sources for mutual flow inflows, will not be able to offer mutual fund advice.

Currently, the Mutual Fund sector’s inflows come from three sources about 40% from banks and 30% each from independent financial advisers and national distributors.

Industry players said for leading players like ICICI Prudential Mutual Fund, HDFC Mutual Fund and others, collection from their bank branches would be higher.

The latest proposals also bar registered investment advisers from distributing mutual funds through immediate relatives.

“The interpretation makes it amply clear that one entity or / family can not offer both distribution and advisory services,” said Anjaneya Gautam, national head – mutual funds, Bajaj Capital, a national distributor that is also separately registered as an investment adviser.

Fund heads point out that there could be a case where one brother was an investment adviser and another a distributor. “How can a person just shut down the business because his brother is an investment advisor or / vice versa?” said a fund manager.

Mr. Sundeep Sikka, CEO, Reliance Nippon Life Asset Management Company, believes allowing IFAs to advise and distribute, but only for certain kind of investors, will make things better. For example, allowing an IFA to offer advice to the retail investor, but to act only as a distributor for large investors. “There can be different rules for both categories. But this could help,” said Mr. Sikka.

The proposed changes will hamper mutual fund penetration in smaller cities as these investors need hand holding. One out of every rupees five invested by individual investors in mutual fund schemes now comes from B15 cities.
SEBI proposal on distributors, Investment Advisors can trip mutual funds Reviewed by S. Chitra on January 05, 2018 Rating: 5 SEBI proposal on distributors, Investment Advisors can trip mutual funds Business from banks will be adversely impacted, advisors likel...

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