Abhijit Bhatlekar/Mint
Abhijit Bhatlekar/Mint

Nudging the distributors

Compared to the concept paper, the final regulations seem to have been watered down in a few areas.

At last, the Securities Exchange Board of India (Sebi) has come out with the much awaited investment adviser regulations. As the first set of regulations created specifically for distributors, there were expectations that they would tackle issues such as conflict of interest arising out of their dual role as “advisers" to clients and “agents" of representatives. In this context, this is what a preliminary study of the regulations reveals.

When compared with the concept paper circulated in September 2011, the final regulations seem to have been watered down in a few substantial areas. To begin with, there should have been a clear demarcation between those who represent client interest and those who represent manufacturers’ interest, as was envisaged in the concept paper. In the final regulations, this demarcation has been addressed obliquely at best and is not clear enough.

Compounding this ambiguity is the issue of whether distributors who do not register as investment advisers continue to use titles, which imply that they provide advice and other services similar to investment advisers. To a lay person, titles such as financial advisers, wealth advisers, financial planners, investment consultants or financial consultants all mean the same—and all are investment advisers. While in the concept paper, everyone other than financial advisers (called investment advisers in the final regulations) were to be called agents only, the final regulations is silent on the titles that non-investment advisers can use.

Majority of distributors out of purview

A vast majority of distributors will continue to be out of the purview of these regulations. Further, with filters such as education/experience, certification and net worth, it can be safely assumed that only a small section of distributors can exercise the choice to be investment advisers.

Finally, even those distributors who meet the criteria to be an investment adviser will have to evaluate the pros and cons of registering themselves. Given the current ground reality, on a purely rational cost-benefit basis, it does not make a strong business case for a distributor to opt to be an investment adviser.

Business case: investment adviser versus distributors

By exempting such a wide range of distributors, life will remain unchanged for a majority of investors and distributors. What could, however, emerge is that some individual distributors would work out an arrangement (on the lines of banks and corporate distributors) with an associate or family member, where one can function as an investment adviser and the other as a distributor. Or else, distributors will run a hybrid model, collecting commissions from asset management companies and wherever possible, charge a “transaction" or “service" fee from clients who are willing to pay.

A new chapter

Nevertheless, the regulations could be the starting point of a new chapter in the distribution of Indian financial services.

It will benefit everyone if there is greater awareness created about the regulations. This way, investors will see merit and value in dealing with investment advisers registered with Sebi. If more investors are seen to be willing to pay fees, there will a stronger incentive for other distributors to turn investment advisers, creating a virtuous circle.

Instead of taking educational, experience and certifications as a surrogate for expertise, it is better to conduct a single but more stringent examination by a body such as National Institute of Securities Markets. This will open up the field to more distributors while ensuring quality at the same time.

From the branding perspective, being a Sebi-registered investment adviser could be a huge differentiator. The implicit “endorsement" of quality and integrity will bestow a big advantage to investment advisers.

Over the years, there has been a big shift in how distributors view their role and responsibilities towards their clients. Most distributors recognize the need to align their business model with clients’ interests. By nudging them in the right direction through the right mix of incentives, encouragement and regulations, the transition to the alignment can be smoother and faster.

The ultimate proof of the effectiveness of these regulations will be when the vast majority of clients served by these investment advisers feel that their financial matters are in safe hands.

Prem Khatri is founder and CEO, Cafemutual

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