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Home / Market / Stock-market-news /  Amfi limits direct plan feeds only to Sebi-registered advisers

Mumbai: In a revision to a guideline it had issued about three weeks ago, the Association of Mutual Funds of India (Amfi; the mutual fund industry’s trade body) has now asked all fund houses to give details of investors who invest in mutual funds (MF) through the direct plan, to only those investment advisers who are registered with the capital market regulator, Securities and Exchange Board of India (Sebi).

In a letter that it sent out to all fund houses earlier last week (Mint has reviewed the letter), it said that any distributor who is not a Sebi-registered investment adviser should not be given details of their clients who invest through the direct plan.

On 26 November, Amfi had told fund houses that all distributors and independent financial advisers can get access of their clients’ direct MF investments, if their clients give a written consent. Although it had sought Sebi’s consent before making this move, Sebi wasn’t too happy when Amfi’s circular finally came out. Sebi contended that it had given the permission for the benefit of only Sebi-registered investment advisers (who charge a fee), and not to all distributors. “It had taken Amfi almost a year to convince Sebi to allow direct feeds to distributors. Finally, Sebi allowed it, but there was a misunderstanding. Amfi has promptly corrected that with a new circular," said Sundeep Sikka, chief executive officer, Reliance Capital Asset Management Co. Ltd.

In January 2013, Sebi had asked fund houses to offer direct plans to investors. Typically, a direct plan appeals to those who understand MFs, know where to invest, can decipher funds and would, therefore, wish to avoid paying distributor commission. It does not have distributor’s cost embedded in it unlike a normal plan, and is, therefore, cheaper.

Direct plans have grown slowly and steadily in cases of equity and fixed income funds where a majority of investors are retail.

Around 9.5% of the overall equity corpus was in direct plans as of September 2015, up from 5.1% a year ago, according to industry estimates. Around 24% of overall fixed income corpus (minus liquid funds) lie in direct plans.

Financial planners and Sebi-registered investment advisers— those who charge clients a fee— also found direct plans attractive. Since they charge clients a fee, many of them prefer to invest their clients’ corpuses in direct plans to help them reduce costs. But a direct plan application does not carry a distributor code. In other words, it was not tagged to a distributor or an adviser and so it was difficult for an adviser to monitor such investments (by getting the fund houses to share these details with them).

Sharing details of such clients with their distributors helps advisers lower costs for their clients and typically demonstrate the value that they could bring on the table.

“The unregistered investment adviser will need some compensation for the efforts and services, however limited or incidental the advice she gives. If the client is going to compensate the unregistered investment adviser, then it will be deemed as ‘fees’. And for getting ‘fees’, a distributor has to be a Sebi-registered investment adviser (according to Sebi investment adviser guidelines). So, with this move, Amfi is sticking to the script," said N. Vishwanath, founder and chief executive officer, Blue Ocean Financial Services Pvt. Ltd, a Sebi-registered investment advisory firm.

A large section of distributors does not appear to be happy at being left out. “Whose money are we talking about here? It is the client’s money. Sebi or Amfi should not dictate as to who can or cannot see their client’s details. If the investor does not have a problem (in giving consent, if she so chooses to), then Sebi and Amfi should not have a problem," said Ashish Shah, founder of Wealth-First, an Ahmedabad-based distribution firm of financial products. If distributors are allowed to give direct feeds, they can choose to channelise a chunk of their clients’ savings through normal plans that earn them commission (to the extent that it covers their expenses and earn them a “decent income") and then put the rest of their client’s money in direct plans, Shah added.

“The underlying cause for Amfi’s latest ruling is Sebi’s view that a person should not carry on both the business of an investment adviser as well as of a distributor. Sharing direct feeds with a distributor would fall foul of this thinking because any distributor who asks an investor to put money in direct plan, is essentially doing advisory. Since she doesn’t get commissions on direct plans, she could be getting compensated from the other side (fees)," said Rajiv Shastri, managing director and chief executive officer of Peerless Funds Management Co. Ltd. The thinking is that one can either be a adviser or a distributor, he added.

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