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'SEBI Has Grudge Against Distributors'

Here is what advisors have to say about SEBI moving to abolish entry loads on mutual funds

After the Securities and Exchange Board of India (SEBI) said that entry loads will be discontinued Value Research asked the very people who will be most affected by the move to give their reactions – the fund advisors.

Here are some samples:

Amita Jain:  "Investors and distributors are two legs and there is no use removing one of them"

Why work when one is not going to gain anything from it? Securities and Exchange Board of India (SEBI) is asking the Mutual Fund (MF) industry to increase penetration among retail investors but has taken out the reason. One should take steps which helps one work honestly. It was a good decision to remove the necessity of furnishing a PAN card for SIPs up to Rs 50, 000, and the board should also consider taking other such steps like reducing the minimum SIP amount, facility of a daily SIP and depositing through cash instead of cheque. Investors and distributors are two legs of the MF industry and there is no use removing one of them.

Rajesh Kulwal: "AMFI and AMCs should also take a stand"

It seems that the present SEBI dispensation has a grudge against the distributor community. The present decision is an act of arrogance on part of the board. It is very clear that the authorities did not think properly while formulating the policy of abolishing commission to MF distributors. No Indian investor will pay a second cheque for commission. Instead they will go to the AMC directly after consultations.

Or did the board buckle under the pressure of the powerful insurance lobby. Because IFAs were advising investors to invest money in MFs rather than ULIPs which charges a heavy amount on various heads. But IRDA is well aware that only insurance advisors can bring in business. SEBI's stand is quite opposite. It wants to eliminate IFAs and promote corporate brokerages and banks. Banks only promote schemes which suits them the most.

Some time back there was an opinion that FIIs should also be charged entry loads as they were entering and exiting MF schemes at will at the cost of retail and small investors.At the time of the financial turmoil when FIIs and corporate investors pulled back their money, it was the retail investors who stayed with the AMCs due to their belief in their advisors. The advisors job includes educating the new investors.

I always told my clients about the commission paid by AMCs and they were comfortable with the load till they were getting good returns from their investments. A few months ago a very senior official of a leading AMC opined that SEBI is worried only about the 2.25% of the investment rather than the major part of 97.75%. If an IFA brings in for example 50 new investors who for a start only invest a minimum of Rs. 5000/- and pays 1% commission, the IFA will be have a bundle of cheques of Rs.50/- each. A single cheque would have served the purpose if the AMCs were to collect the commission and then disburse it to the distributor.

If a small investor who has an SIP of Rs.1000/-pm, and agrees to pay 1% commission, is it practical for him to issue a cheque every month. I don't think the investor will be willing to pay in advance for the entire period opted for SIP. The AMFI and most of the AMCs believe they can bring in business without the help of IFAs. Another suggestion was shifting the business to insurance ULIPs. It would be unjust to our investors who has reposed their faith in us. The best way is to stop selling for some time. Let AMFI and AMCs take a stand instead of simply watching from the sidelines. I also believe we should seek the intervention of the Finance Minister.

Alpesh Patel:  "SEBI step good for developed markets"

The steps taken by SEBI were good enough if it was operational in developed markets. India is a retail market and when we have products like ULIPs which pays 12-20% commission or more why should we make investor make investment where we get no commission. So I think the insurance mis-selling will be at its peak in coming few months until IRDA wakes up and stream lines the commission structures. 

K.G.Poddar: "Regulation to adversely affect distributors, sub-brokers and employees connected to it"

SEBI is perhaps bringing in new rules every time to finish all distributors. We are not eating up all the money that is invested. It is the insurance companies which is doing it. SEBI is only concerned about 2.25% entry load in MF whereas in insurance even up to 100% is charged in some policies and SEBI is not bothered about it. The only culprit in front of SEBI are we distributors. I agree that in all sectors, cost of each product should be disclosed and then margin of profit should be bargained. Instead of writing MRP on each product they should write cost price of that product. 

On one hand SEBI is implementing KYC to prevent black money and on the other hand they are encouraging others to create black money. Firstly, none gives cheque for commission and even if one has, then they will deal in cash instead of cheque. This will not only create more black money but also there will be huge loss of revenue in form of Income Tax and Service Tax.

The next steps would perhaps be writing to the finance ministry telling them about the huge revenue loss in form of compulsory Service Tax deducted and also Income Tax that is paid on same amount. MF companies are least concerned with our interest and are working closely with the board it seems. More than One lakh distributors and several lakh sub-brokers and employees connected to them will be affected indirectly.

SRK:  "Not paying service tax is perhaps the only thing which I am happy about"

On one hand, SEBI says that MFs should have more retail participation. But in reality it has just put the death knell for retail investments, except for a handful who can do it on their own. My bigger clients, even those from the financial field, relied on me, paying the entry loads, for their investments as they know bookish knowledge and ground realities are generally different. And this commission held me to cross subsidize the lower commissions from my retail clients, many of whom are just with a Rs. 500/- SIP per month. Even though my cost of providing service to them works out to Rs. 100/- or so. Nowhere are my costs going to be recovered from their income.

So now with the new SEBI rulings, I would have to go and inform my larger clients that SEBI has removed my commissions, so you pay me Rs. 2000/- for your 1 lakh investments. And besides if I go to a retail client for a Rs. 500/- SIP, for 2 years, and tell him my consultancy charges are Rs. 500/- and he agrees to pay, what the cost of it going to be??? Rs. 500/- on a Rs. 12000/- total investment in 2 years, works out to over 4% load. And how many retail customers are going to do that.

I totally agree with SEBI's rulings, but then they do need to study the ground realities too. The idea is good, but there should have been a certain minimum, till which it should have been excluded. Maybe say Rs. 5,00,000/- investments in a year per person, and with PAN being compulsory for all investments now, its easy to workout the total investments. One thing I am happy about is that now I won’t be paying 10.3% Service tax on commissions and up-fronts and I can charge the whole amount from my investors.

The grouse for every Mutual Fund advisor is why so much hue and cry being done over 2.25% when a blatant misguidance in form of 40-50% commissions, blatantly wrong marketing practices and exorbitant non-transparent charges, being completely looked upon in the insurance industry.

Kalpesh Ashar: " SEBI’s regulation invites many questions"

There are certain potent questions which we as financial advisors distributing Mutual Funds, would like to ask SEBI before they implement the no entry load on MF rule. Have they genuinely thought about it or wilted under the ‘pressure’of lobbying from a separate regulatory body?

1) What investor benefit are we talking about? Does an average investor know the appropriate fund selection process according to his risk profile or the path to achieve his goals for the long term? Does he know the capital risks attached to his mutual fund investments? If a genuine financial advisor imparts his advice to the investor, is he not entitled to his professional fees by the regulatory authorities? Is imparting financial education or creating awareness a professional job or a crime?

2) Why does SEBI always create roadblocks and crack the whip for the Mutual Fund industry at precisely the time when there is a genuine requirement of retail participation in the capital markets? In February 2008, when the markets were sliding, KYC requirement came into action and now when the Indian investor is recovering from the gloomy scenario and is ready to participate, there comes the final nail in the coffin – de-linking the distributor/ advisor/AMC from the retail investor. 

3) Why is an ambiguous product like ULIP promoted and rewarded by the authorities to its agents selling it to the unaware investors? If we are talking about Investor benefit here, every qualified financial professional will understand the difference between investing in a ULIP and a Mutual Fund. Why this hypocrisy? If you genuinely want uniformity then let's have common commission structure (2.25%) for an agent selling a ULIP and an equity mutual fund. If the distributor/ agent have basic financial knowledge and investor benefit in his mind, ULIP as a product will completely fade out.

4) Does SEBI envisage a situation when an AMC would appoint executives to make direct calls to the retail investors or for that matter send their personnel to get business from NRI's / HNI's based outside India. Who would be responsible for bringing investments to the AMC's? It is us distributors who have taken this onus.

This move sincerely defies logic and has come as a very rude shock for all of us. We as financial advisors feel back stabbed not by any outsider, but by our own. 

V. Khawani: "It is not the right time to bring in such a regulation"

I have never tried to mis-sell any product for any Mutual Fund Company. My clients benefits come first than commission offered by AMCs. Our duty is not only filling up the forms and submitting them to AMCs, but also face service related issues like non-receipt of statements or dividend/redemption warrents, change of bank mandate and residential addresses, helping investors to get their KYC done and others.

SEBI’s recent regulation had made me inform all of my clients but they refused to go for direct investments except one. With this new regulation, I lost commission of Rs.6000/- in a single day, as I had already taken applications from my clients. I knew it was on SEBI's agenda. However one of my clients has refused to pay me. The situation with small advisors like me might well be like this and many might be out of business. The regulation it will keep retail investors away from mutual funds.

Advisors might not encourage SIPs from now on. What options do they have? Go every month to our clients for our commission, or charge them at the time of the initial investment for the entire period of SIP? What is there to stop investors to seek our advice & services to start SIP & then going to AMC to change it to direct next month?
I agree, this move will be beneficial to investors, but how many investors go directly to invest in mutual funds? Not many of them have the knowledge or time to study and invest in them.

It is IFAs like me, who create awareness of mutual funds in investors and the board has sidelined us. It is perhaps not the right to come out with such a regulation. 

Also read :
‘Don’t Kill the MF Industry’
'It is Like Being Laid Off'
'Sebi's decision will be counter productive'
'Investors Are Not Self-Motivated'