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Relationship with your adviser to get more official

With Sebi's emphasis on bringing more distributors into the ambit of investment adviser regulations, investors are set to get more professional services that would be better documented

Some big changes are likely to take place in the office of your neighbourhood distributor, whom you go to when you want to buy mutual funds.

The changes could reflect in the way she talks to you, the way she manages your relationship, the way she charges you—or will most likely begin to charge if she hasn’t been doing that already. In general, your relationship with her is set to get deeper, more professional and better documented.

The capital market regulator Securities and Exchange Board of India (Sebi) came out with a consultation paper on 7 October, which proposes that all mutual fund distributors who embed advice—big or small—in their services, must register themselves with Sebi as registered investment advisers. The paper aims to strengthen the Sebi (Investment Adviser) Regulations, 2013.

Sebi has invited comments from the general public till 4 November, after which it is set to become law. Let’s take a look at the shape of things to come.

Either adviser or distributor

Sebi has proposed that if your distributor advises you to buy you a mutual fund, she needs to become a registered adviser.

Till now, she may not have charged you a fee but was still earning commissions off your mutual fund investments—the advice may therefore be incidental. But now, if there is even a speck of advice in her services to you, she would have to become a registered adviser. You can read more about the proposed changes at: http://bit.ly/2d26VYW.

A Sebi-registered adviser, as per the regulator’s guidelines, is a professional adviser who has a fiduciary responsibility to manage your money. She has to know your risk profile in detail and suggest products that are suitable to you, and nothing else. She is subject to detailed audits and also charges you for her advice—all in a transparent manner.

“Three years after Sebi came out with registered investment adviser regulations, only about 500 people or entities have (enrolled) as registered advisers. At large, distributors avoided these registrations because they were exempted on account of limiting their services to just one product. The cost of compliance was also high. So, Sebi has gone one step further and removed the exemption," says Rohit Shah, a registered investment adviser, and founder and chief executive officer of Getting You Rich, a financial planning firm.

Your distributor would get 3 years to transition to a registered adviser. If she runs a one-person operation, she will now only advise you on which funds to buy or sell and when to buy or sell them.

You would have to find yourself someone else to do all the paperwork and procedures involved in buying and selling. The person who helps you buy and sell, as per the new nomenclature, is a mutual fund distributor who will charge you a basic transaction fee of Rs100-150 for every transaction.

Your old distributor would now be called a registered investment adviser, if she chooses to get registered. In simpler words, your registered adviser gives you advice on what to buy or sell, and your mutual fund distributor helps you to buy or sell them.

Will it cost you more?

You pay for the above services even today. But now on, it would be more transparent and that’s a good thing. Currently, you are charged up to 2.50% of your annual mutual fund assets (in an equity fund) and 2.25% (in a debt fund), of which a chunk go to your distributor as commission.

Now, your registered adviser will charge you directly. So, you can invest in a direct plan (a plan that is cheaper as it does not have distributor costs) and your registered adviser will get to monitor your investments. (Read here: http://bit.ly/1NZe7j9.)

There seems to be a small loophole here. A small-town distributor who spoke to Mint on condition of anonymity, said that distributors in such towns (more popularly known as beyond top 15 cities or B15) will try to subvert the rules. They could continue to ‘advise’ their customers, informally and not in writing. When there is no written record of advising, they could avoid getting registered as investment advisers.

Thus, there is a chance that if you are in a B15 town, your distributor may not ask you for fees. Is that good news for you?

No. “Eventually, Sebi may abolish trail fees also. If the distributor (the one who doesn’t register with Sebi as an adviser) does not (and cannot) give you advice, then why should she get trail fees?" asked a large distributor who did not wish to be named.

So, if your distributor doesn’t get a commission, how will she earn her revenue? She will have to start charging you, and therefore, even she will be forced to become a registered adviser. And you would get to invest in direct plans and save costs there: the fees you pay will get more transparent.

The consultation paper doesn’t say all this yet, but experts who we spoke to, say that it’s only a matter of time.

No more SMS, Whatsapp tips

Some of us get tips about which stock to buy. Some of us get them regularly. This will stop. Sebi aims to prohibit the so-called experts from sending out stock tips to general public unless they become registered investment advisers.

“Sebi is asking them to register as it is a free for all without any accountability. They are preying on the gullibility of the public at large," said Suresh Sadagopan, founder, Ladder7 Financial Advisories.

If they register, then they will have to be responsible for their actions. They need to establish how they have given suitable advice as per clients’ risk tolerance and also have to comply with various other sections of the regulations “Once they register as advisers, since they are going to show compliance, they can communicate with clients. But they may segment different categories of clients and send one type of communication to every client type," added Sadagopan.

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