Sebi moves to prevent mis-selling, conflict of interest

Corporate investment advisers can now decide at a client-level whether they want to provide advisory or distribution services

Securities and Exchange Board of India (Sebi) has barred the use of the description “Independent Financial Advisor” (IFA) or ‘Wealth Advisor” or any other such names by distributors of securities unless they are registered as investment advisers with Sebi under the Investment Advisors Regulations, 2013.

The move directly affects the roughly 100,000 mutual fund distributors many who have used the IFA tag.

Sebi's decision, in its board meeting on 17 February, 2020, addressed the concerns of conflict of interest that continue to plague the quality of advice that has affected the mutual fund industry when distributors who receive a commission from the AMC also provides advice, or when registered investment advisors who provide advice for a fee also act as distributors.

Now Sebi has plugged the leak at both ends by preventing distributors to use nomenclatures that are likely to mislead the mutual fund investor as to their role and by barring individual registered investment advisors from being mutual fund distributors. Corporate investment advisors can now decide at a client-level whether they want to provide advisory or distribution services. “We need more details for clarity. Will there be clear differentiation between and MFD and an RIA in terms of permitted activities and services or is it only a difference of nomenclature? Can a distributor still provide incidental advice?” said Erik Hon, Managing Director, iFAST Financial India Pvt. Ltd.

The move directly affects the roughly one lakh mutual fund distributors many who have used the IFA tag to informally combine the distribution and advisory services and to justify the advice as incidental to their distribution activity. This was compounded to some extent by Asset Management Companies that encouraged investors to seek professional help for better financial advice and for most investors this meant the mutual fund distributors who was their point of contact. Mutual fund distributors have seen value in using descriptions such as IFA to garner business.

“While this move by Sebi will not affect referral business, it will definitely have an impact when you are trying to reach out to a prospective investor who has nothing with which to gauge the value you will bring to the table”, said Pramod Bajaj, founder, Pragmatic Investment Solutions, a mutual fund distributor. “Mutual fund investors manage the lower end of the client base. Even today the average SIP size is Rs.2,700. Restriction on nomenclature on distributors can hurt market growth”, said Amol Joshi, founder, Plan Rupee Investment Services, a mutual fund distributor. Both Bajaj and Joshi agreed that distributors will now find ways around the nomenclature issue by using terms that are acceptable to Sebi and at the same time communicates their expertise.

For mutual fund distributors looking to move to an advisory model the lack of clarity and settled guidelines in the advisory space seem to be a concern.” The constant tinkering with eligibility norms and what can or cannot be done makes it difficult to initiate the process for changing the model for many”, said Bajaj.

Sebi is expected to come out with more details of enhanced requirements relating to educational qualification, experience and net worth requirements for registered investment advisors. The additional qualification and experience requirements will be grandfathered for existing individual investment advisers.