The recent SEBI decision to eliminate entry loads in all Mutual Fund schemes, both existing and new, marks a dawn in the distribution of Financial Services in India. This directive calls for bringing transparency and knowledge output into the system. In simple terms, the SEBI decision redirects the flow of distributor commission from the currently practiced “AMC to the distributor” to the proposed “investor to the distributor directly”.
In the new scenario, the quantum of the commission will be decided by the investor on the basis of quality of advice and services rendered by the distributor. Investor education takes centre stage here.
Needless to say, instances of investors being misled into a transaction would decrease substantially as a result of the SEBI decision if the investor education is also implemented.
On the part of distributors, the decision underlines the importance to disseminate quality advice, which is in sync with the life goals of an individual. Here, financial planning gets merit over other like services. This is a paradigm shift in the services rendered from transaction-driven to process-oriented, and from product-centric to client-centric.
The proposed format of services is practiced by financial planners worldwide. The immediate demand on distributors is to upgrade their skills by understanding the impact of different mutual fund product categories on the parameters of risk, return and taxation. The suitability of individual product category from the viewpoint of the realisation of an investor's goals in the short term as well as long term must be carefully analysed.
The asset allocation prior to and post investing in a product should be in sync with the financial goals of a client. The investment product should match the cash flow needs of a client.
These are accepted criteria, among others, that a Certified Financial Planner, certified by FPSB India, employs while recommending a product to clients.
Thus, the SEBI decision calls for a complete overhaul in the way financial advisory will be delivered in future.
Many Financial Planning practitioners already started a practice of their own. Also several institutions initiated the process of putting their executives for training in wealth management and financial planning services. Charging fees directly from the client might have been looked as an esoteric concept, however SEBI has dispelled all myths.
The SEBI directive would also initiate other global certifications in the discipline to be established. For example, FPSB China in addition to CFP also conducts a course Certified Private Banker (CPB), which is gaining good popularity. The same is also recognised by FPSB, US.
A suitable code of ethics as well as practice guidelines must drive the relationship between investors and advisors.