Who cried for travel agents?
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The Securities and Exchange Board’s (Sebi’s) 7 October consultation paper (http://bit.ly/2dExDby) proposes that mutual fund distributors cannot offer advice or call themselves ‘advisers’ or ‘wealth managers’. And that those distributors who do offer investment advice will have to register with Sebi specifically as investment advisers—and won’t be able to earn trailing commissions. Sebi’s objective is simple—unbundle the advice from the execution, and make the investor aware of the fee he pays.
The distributor community is up in arms complaining that “clients don’t pay fees,” “how will we survive if we don’t earn commissions?” and “Sebi should work with distributors rather than against them.”
These self-serving arguments ignore one crucial detail. Sebi was not created to protect the interests of brokers, distributors or agents. According to its charter, Sebi was set up “to protect the interests of investors in securities”. And all its recent recommendations are clearly in the investors’ interest.
We calculate that if a 35-year-old investor were to put Rs10 lakh in a 1% commission bearing regular plan, which grows at 8% a year, his investment would be worth Rs76 lakh when he retires at 65. On the other hand, if he switched to a direct plan of the exact same fund and cut out the 1% annual commission, the value of his investment would amount to Rs1 crore over the same period. In other words, by buying a regular plan, you end up losing a quarter of your total savings as fees to your broker, or adviser, without even realising it.
Sebi is not alone in batting for investors over intermediaries. Regulators globally are working harder than ever before to ensure that the adviser community works in the interest of investors. The Australian Future of Financial Advice reforms have banned conflicts of interest over how advisers get paid and ensured that clients receive annual fee disclosure statements. In fact, in Australia, new clients now have to actively ‘opt-in’ to existing fee arrangements every 2 years. In the US as well, the Fiduciary Rule, which kicks in on April 10, 2017, requires advisers to put their clients’ interests above their own financial gain when offering individual retirement advice.
In today’s low-growth, low-return world, it is natural that the fees earned by investment managers, brokers and financial advisers, should fall. Significantly, in its consultation paper, Sebi has devoted an entire section to robo-advisors, This makes Sebi one of the first regulators globally to recognise the potential of lower-fee robo-advisors to give sound investment advice to lower-net-worth and younger investors at a fair price. Advisers that don’t engage their investors digitally with transparent, real-time reporting and on-demand service, will be left behind. Other models will soon emerge, such as hybrid human-tech models—where clients can access a human adviser for questions, support and guidance. Looking further out, robo-advisors will integrate artificial intelligence, making themselves more ‘human-like’, and therefore, more appealing to their consumers.
The challenges faced by traditional distributors and advisers today are no different from those faced by travel agents 15 years ago. Commissions on airline tickets, that were once as high as 7%, have been replaced with low or fixed fees irrespective of the ticket price. New online travel agents have emerged to successfully attract consumers. The old guard of travel agents, who did not embrace this change, have been driven out of business. All this has been a win-win for the consumer. The future of online investment advice will be no different. So the next time your traditional distributor, agent or adviser whines about the changes proposed by Sebi, don’t shed a tear for him. Instead, ask him one question: “Who cried for the travel agents?”
Kunal Bajaj is founder and chief executive officer of Clearfunds, a Sebi-registered online investment adviser.