Capping of commissions alone may not work in stopping mis-selling
I recently read that the Securities and Exchange Board of India may be planning to cap distributor commissions in mutual funds. While the market regulator is rightly concerned about mis-selling, there exist some systemic issues connected to commissions, which need to be addressed alongside. As a financial educator, I meet mostly retail investors at my sessions. There are some who are already investing but a majority of participants are those who have not yet invested in MFs and want to start now but with smaller amounts. The preferred investment is in an equity fund SIP. Every session I conduct only reiterates what I have been saying all along, the retail investor has no access to advice.
The reasons are manifold. Firstly, at the current commission, a distributor will not be able to cover even the cost of transportation used to get an SIP of ₹ 10,000. So servicing customers who are investing less than ₹ 10,000 is not economically viable for the adviser and she may choose to advise a new fund offer (NFO) with higher revenue. While some distributors may consider working on volumes or waiting for a while for clients to increase their investments, many may not be able to take this gamble.
Secondly, whether a customer has ₹ 10,000 or ₹ 50,000 to invest, the time the advisor needs to spend with the client to answer all queries is the same. Even though the Mutual Funds Sahi Hai and other campaigns have talked about the benefits of MFs, investors still need further education and also need to be convinced to invest. People find it surprising when I tell them of the number of queries I receive on “why a mutual fund should be chosen when it is subject to market risk and does not give guaranteed returns". Hence, the adviser would obviously veer towards the larger customer.
I believe that it is important for the regulator and the MF industry to figure out how the real retail investor is going to invest the right way. Currently, with no access to advice, many investors tend to choose online transaction platforms and are seen choosing funds based on past 1-3-year returns. This is a recipe for disaster and sooner or later, these customers will be the first to panic and exit in volatile markets. Not to mention the bad reviews that they would give to their near and dear ones about MFs.
With MF penetration being low and issues in access to advice, capping of commissions alone may not work in stopping mis-selling. Here are some suggestions on what can be done:
1) Have a uniform brokerage structure for a particular category. For example, for all large-cap funds, there should be a minimum and maximum brokerage and the range should be restricted to (+/-)0.5% from the median. So the situation of Fund A paying 1% and Fund B paying 4% will not arise. Even NFOs should have the same range as the category they fall in. This way a fund would be recommended based on suitability and performance.
2) Having an all-trail model will certainly reduce the churn.
3) A standardised fee structure for registered investment advisers would help customers who want to engage with financial planners, get clarity on the costs involved.
4) The importance of an adviser needs to be highlighted. All distributors seem to be painted with the same brush and portrayed as earning large commissions by mis-selling, which is certainly not the case. The Association of Mutual Funds of India (Amfi), under the Mutual Funds Sahi Hai campaign, should spread awareness of the benefits of having an adviser. In my sessions, I come across people who have no knowledge on financial planning and bypass advisers to invest directly, mostly into the wrong funds, simply because they assume that an adviser will dupe them. Amfi can help investors by coming out with a guidance note on points to keep in mind while dealing with advisers.
5) A guidance on funds suitable for retail investors, along with the risks involved, will be useful. While Sebi has notified categories like sector or thematic funds, these funds really do not have a place in a retail investor’s portfolio. Maybe Amfi can work on a kit that guides first-time investors to start by investing in multi-cap funds rather than jumping into small-cap or thematic funds.
The insurance industry was successful in penetrating to even small towns because of its agent network, which educated customers and in turn used them as proponents of the insurance company. The MF industry also needs its customers to propagate schemes to their family and friends in a positive way. Unlike the insurance industry, MFs can help customers take the right course with a combination of regulation and education.
Mrin Agarwal is a financial educator, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra
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