SEBI's push for the mutual fund sales process to shift from the commission model to the advisory model may have been postponed indefinitely, at least if one goes by the statement that was issued after last week's meeting of the regulator's International Advisory Board. To recap, the commission model is the one commonly followed, where sellers get a percentage of the value of the investment. In the commission model, the salesperson is often concerned with selling the highest commission product, rather than choosing whichever (if any) is right for the investor.
In the advisory model, there is no commission and the investor pays for advice. In fact, the sales may not even happen through the advisor. Clearly, the advisory model is better for the investor. However, the problem, as in so many good things, is the transition from one state to another. A rapid switch to the advisory model would likely leave smaller and beginner investors underserved. It would also make mutual funds even more disadvantaged compared to insurance products which are entirely driven by high commissions.
SEBI's current regulations demand a strict isolation between those who are following a commission model and those who have switched to an advisory model, but this hasn't really led to a shift to the latter. There are many reasons, some financial and some behavioral and cultural, but this isn't going to be an easy switch. For example, a hard isolation of the sales and the advisory model is difficult. In a sales situation, what would happen if a customer asked whether a fund is good (a conversation that happens in the sale of any good or service)? Would the agent refuse to answer? Clearly not.
In any case, investors will have to stay prepared for the malpractices that come with the advisory model. Perhaps the only solution is the robo-advisory model, whereby technology is used to provide advice in a low cost and efficient manner.
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