India distribution proposals face mounting opposition

Asset managers, advisers and distributors in India say planned rules to separate provision of investment advice from sale of mutual funds will hamper investment industry growth.
India distribution proposals face mounting opposition

As momentum gathers behind plans to overhaul how investment advice and products are sold in India, industry criticism of the proposed changes is growing louder.

Fund managers and distributors in particular are hoping India’s markets regulator will tone down draft rules. Some have voiced strong opposition to the mooted new framework, though there are industry participants in favour of the plan.

The key proposal by the Securities and Exchange Board of India (Sebi) is to separate the process of mutual fund distribution from the provision of investment advice (see box below). The regulator's aim is to eliminate the conflict of interest that arises when an investment adviser both offers advice and sells products.

Sebi’s proposals are expected to hit mutual fund distributors hard because incidental advice is typically offered as part of the process of selling funds, but that would not be allowed under the new rules. 

The regulator has refined its proposals in several stages starting from 2013, with the latest details set out in a consultation paper published in late June this year.

Industry concerns

Manoj Nagpal, chief executive of Outlook Asia Capital, a wealth advisory and investment firm based in Mumbai, said Sebi's plan was un-focused and ill-thought out.


With the aim of ensuring investors gain access to quality advice, Sebi introduced its Investment Adviser Regulations in 2013.

The goal was to create a new class of registered investment advisers who would offer advice for a fee and not distribute products. However, the regulations contained many exemptions and grey areas.

Sebi introduced a new consultation paper on the subject in October 2016 and followed it up with a revised version with more clarifications on June 22, 2017. 

The latest document contains the following key proposals:
  • There will be clear segregation between investment advisory and distribution/execution services.
  • Mutual fund distributors can only explain/describe the features of mutual fund schemes of which they are distributors, while ensuring scheme suitability for investors.
  • Mutual fund distributors cannot provide any investment advice or financial planning services to investors.
  • Mutual fund distributors need to disclose to clients the list of funds they distribute, commission earned, suitability of the product sold to the investor and a disclaimer that he/she may not be acting in the best interest of the investor.
  • Intermediaries that provide investment advice or receive a consideration for investment advisory services must register with Sebi as a registered investment adviser (RIA).
  • RIAs will not be allowed to sell/distribute any investment product to clients.

While the goal to separate advice from distribution is commendable, he told AsianInvestor, the fact that the draft rules are limited to products that invest in securities and exclude those related to real estate or insurance is likely to lead to asset managers conducting regulatory arbitrage.

“Creating financial arbitrage is not the best way to ensure that financial advice reaches end-investors effectively,” added Nagpal.

He argued that all the local regulators—across capital markets, real estate and insurance—should come up with a universal set of guidelines to encompass all financial products.

Others are also concerned that the rules would hamper the nascent but fast-growing industry’s progress by leading to a fall in the number of advisers.

India’s mutual fund AUM stood at $327 billion at the end of August—a sixfold jump from $51 billion in March 2007, according to the Association of Mutual Funds in India.

However, there is still a very small proportion of mutual fund investors in India—about 20 million out of a population of 1.2 billion, said Akhil Chaturvedi, head of sales and distribution at Motilal Oswal Asset Management, a local firm with some $1.7 billion in AUM.

"If we want to grow that number, we need an army of competent advisers and distributors,” he told AsianInvestor.

There are only around 600 registered investment advisers (individuals or firms) in India, said Chaturvedi. “We don’t have enough advisers to go around collecting small investments ranging from Rp5,000 ($77) to Rp10,000 from retail investors."

Mutual funds account for a small portion of portfolios in India—just 3.4% of total investments in financial assets by individual investors in the financial year ending March 2015, according to a report published by EY in September last year. It cited a lack of financial awareness as the main reason for the low penetration.

Retail investor impact

The independent financial advisory community agreed that Sebi's proposals threatened to make the situation worse, notably for for Indian retail investors.

Sebi's proposals will increase the "advice gap", said Asit Bhansali, director at the Foundation of Independent Financial Advisors. "Only rich investors will be able to gain access to financial advice."

He said the proposals would drive individual advisers—who help channel investor savings from small towns and villages—out of the market, while raising costs in the long term for such retail clients.

Motilal Oswal's Chaturvedi said Sebi’s proposals will also raise costs for the mutual fund industry, as if distributors want to provide advice, they will need to set up new infrastructure and teams and acquire the required licences.

However, some were supportive of Sebi's plan to clamp down on fund distributors generating fees from offering both distribution and advisory services.

Munish Randev, chief investment officer at Waterfield Advisors, a Mumbai-based multi-family office, said it was a step in the right direction to tackle conflicts of interest.

“Clients go to their investment advisers expecting to be recommended products that are good for them,” he told AsianInvestor. “The reality is that distributors sell products with high revenues and commissions.”

Waterfield is a registered investment adviser and does not accept commission or brokerage payments from product providers.

Similar moves elsewhere

Sebi’s proposals have parallels elsewhere. In the UK, the retail distribution review introduced in January 2013 barred financial advisers from earning commissions from fund companies for selling or recommending their investment products.

In the US, a fiduciary rule introduced in June 2016 requires advisers to investors saving for retirement to comply with “impartial” conduct standards, including offering advice that is in the best interest of the client.

Of course, the UK and US are far more developed in terms of mutual fund adoption. According to EY's September 2016 report, India’s mutual fund AUM-to-GDP ratio was 7% in 2015, compared to 114% in Australia, 91% in the US and 51% in the UK. 

The deadline for public comments on the Sebi consultation paper was July 31, but the regulator is expected to take its time digesting public and industry opinions. Given the profound impact these regulations could have on the mutual fund industry, it is likely to take months before settling on the final regulations.

Sebi did not respond to a request for comment.

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