As I travel around different cities in India and meet financial advisers and their clients, I find that advisers are making an effort to educate their clients about what is happening. Clients, too, are making an equal effort to comprehend the change. Not long ago, before 1 August to be precise, asset management companies (AMCs) were charging entry loads for mutual funds (MFs). Entry loads have now been scrapped by the Securities and Exchange Board of India (Sebi) and MF distributors have been told to collect any upfront commission directly from the client—that is, if the clients wish to pay for the service. Note that the charging entity has changed—from the AMC to the distributor.
So, what could be the spirit behind Sebi’s move? By scrapping entry loads and, thus, keeping a check on the commissions paid on MF products, the distributor is expected to suggest products suitable to the client and not get swayed by high commissions.
Let’s look at what’s happening in other countries. The Retail Distribution Review in UK wants to ensure zero commissions on all financial products by the end of 2012. The parliamentary committee in Australia, headed by parliamentarian Bernie Ripoll, recommended a cease on payments from financial product manufacturers to financial advisers. The Markets in Financial Instruments Directive in the European Union emphasizes full disclosure of commissions and detailed guidelines on Fair Dealing in Singapore is putting significant responsibility on financial advisory companies for delivering fair dealing outcomes to customers. So, if many other countries seem to be thinking in this direction and Sebi has already taken a step forward, what is the problem?
There exists a regulatory arbitrage today. Broad industry numbers suggest that a substantial portion (about Rs7,500 crore) of retail investment went out of equity MFs and between August and December, every month had net negative sales—redemptions were greater than new purchases. I read that unit-linked insurance policies (Ulips) contributed significantly to the Rs12,000 crore of insurance premium as on December, which grew 75% year-on-year.
So, can we hypothesize that retail investment is still finding its way into capital markets at a higher cost of participation? Like Ulips, equity-linked saving schemes (ELSS) get you tax benefits, but what got pushed most in this tax season? Ulips that gave higher commissions (not to forget corporate fixed deposits). But are commission disclosures for all retail financial products mandated? Not yet.
The investor should be able to differentiate between a chemist or a commission-based distributor and a doctor or an independent financial adviser. The medicines or retail financial products will have to be categorized as over-the-counter and prescription drugs. Doctors must have the patient’s case file, and if they also dispense over-the-counter and prescription drugs, it must be at the manufacturer’s price. The chemists can dispense only over-the-counter drugs at the minimum retail price. Therefore, we need both doctors and chemists.
My colleagues in Singapore, who saw the implementation of the FA Act in 2002, laud the then head of Monetary Authority of Singapore, Lee Hsien Loong, now the country’s prime minister. I am prompted to quote what he said 10 years back because of its relevance in India now. He said: “While we seek to educate every investor in the basics of financial planning and investing, most investors will still benefit from professional advice. At present, in Singapore, personal investment advisory services are largely confined within the respective asset classes. Insurance brokers and agents sell insurance, stockbrokers deal with shares, banks and fund management companies sell unit trusts. Financial advisers who wish to provide advice and distribute different financial products have to be licenced or registered, or both, under different statutes. We aim to change this model to promote the emergence of a single class of independent advisers, who can offer comprehensive financial planning and advice on the entire range of investment options. Their interest will lie in representing their clients, rather than pushing any particular product or service provider.”
The regulations have brought a significant shift in the retail financial landscape for the better for all stake holders—customers, advisers and product manufacturers. Early trends in Hong Kong and Malaysia were similar. The Financial Stability and Development Council (FSDC) will address inter-regulatory coordination issues (I picked this from the Union Budget 2010). FSDC has an uphill task—there is a highway, there are many lanes and there are important exits. However, only one lane seems to have traffic lights!
Rajesh Krishnamoorthy is managing director, iFAST Financial India Pvt. Ltd. Your comments, questions and reactions are welcome at firstname.lastname@example.org