SEBI proposes to restrict Mutual Fund Distributors from offering investment advice; Is it correct?

There is a debate on segregating sales from investment advice.SEBI has proposed that mutual fund distributors cannot give investment advice to buyers and proposed to make it compulsory for mutual fund distributors  who give advice to register as investment advisers. We reproduce the view of Prof Pattabiraman at  IIT-Madras as published in ET wealth on 16th January 2017.

Quote

Steve Jobs said, "People don't know what they want until you show it to them". This applies to conflict of interest. In a recent consultation paper, Sebi proposed that mutual fund distributors should not provide incidental or basic investment advice in respect of mutual fund products and should not call themselves advisers.

This is a step in the right direction. The person who advises about investments or any aspect of money management should only receive compensation from the investor who has sought such advice. 

Earlier, Sebi had introduced the investment adviser (IA) regulations that required registered advisers to "put their clients first" (fiduciary responsibility). Now it wants to ensure that those who sell products for commissions do not offer investment advice. 

Unfortunately, many investors are not even aware of such regulations and cannot differentiate between a relationship manager, mutual fund distributor and an investment adviser with a fiduciary responsibility. 

The average investor is likely to ask questions like, "Which is the best fund to invest in?" or "Can I use this fund for my daughter's education?" to a distributor or bank manager, expecting instant answers. The answers to these questions represent investment advice and a regulation cannot succeed if investors cannot differentiate between the different players in the system. 

Also, banks can still distribute mutual funds via a separate subsidy. Is enough really being done to curb mis-selling? 

I believe the only effective way to remove conflict of interest and mis-selling from the system is to impose regulations at the fund house level and abolish regular mutual fund plans. If investors want advice, they can pay a fiduciary. 

If they want to do-it-themselves, or not want to invest in mutual funds at all, then it is their choice. Investor protection comes first. "Awareness" about mutual funds can (and will) grow organically in a 'young' India. 

At the very least, Sebi should assign a non-aligned agency to spread awareness about who can provide investment advice and who cannot, using the ample investor awareness corpus available with fund houses. 

Unquote

UK,Canada and Australia have already segregated distribution from investment advisory. SEBI has referred the matter to International Advisory committee to take a call about its implementation in India soon.Days are not far away when the consumers will get unbiased advice from Investment advisors before investing through distributors.

Last modified on Saturday, 28 January 2017 08:26

Prakash Praharaj

Shri Prakash Praharaj has a passion for excellence. He has been awarded two gold medals for securing top positions both in Graduation and Post Graduation in Commerce. He is an MBA with specialization in Finance and marketing. He has been awarded Diploma in Treasury, Investment and Risk Management besides CAIIB from the Indian Institute of Bankers. He is a Certified Financial Planner from the Financial Planning standards Board, India (FPSB), affiliated to FPSB, Denver, USA and Certified Personal Financial Adviser from NISM. He is also a SEBI registered Investment Adviser vide Reg. no. INA 000000045 dated 2nd August 2013.His book "Your Every day guide to Personal Finance and Insurance" has been published by CNBC TV 18 in August 2015.

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