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The end of advice?

The mutual fund business has a two prong approach-advice and distribution. SEBI has mandated the disassociation of the two services. We are yet to see how it pans out

The end of advice?

SEBI has taken yet another step on what has become a long saga of separating out those who distribute mutual funds to savers from those who advise savers. It's an important step and one which may bring some success in this quest. Or, it may revert us to the distributor-only situation that has always been the norm.

The idea of isolating sales from advice is quite simple. Traditionally, those who sell mutual funds get paid commission by the AMC. This arrangement is identical to what happens in insurance as well as many other financial products. In theory, sellers of these products listen carefully to the needs of the saver, choose the most suitable product and then sell it to their client.

That's the theory. In reality, it is an inviolable law of business (and indeed, of life) that the one who pays the piper calls the tune. Superficially, it appears that the investor is the customer of the agent. However, that's just an illusion. The real relationship is that the mutual fund company is the agent's customer. The saver/investor is actually the product. The agent delivers the goods (you) to the company and gets paid for it. The whole activity is optimised towards maximising the company's sales and the agent's commission while maintaining the facade that it's the investor's future benefit that is being optimised.

Now, SEBI has released a consultation paper that has proposed to make this isolation tougher. The paper recognises the fact that most advisors have a distribution arm, too. Individuals had done this by arranging for a family member to become a distributor, while institutions had created a fig leaf of having a different department or subsidiary to do the distribution.

Now, SEBI has doubled down and said that individuals "who are willing to get registered as investment advisers shall not provide any distribution services in financial products, either directly or through any of their immediate relatives. Similarly, individuals providing distribution services shall not provide advice for investing in financial product either directly or through their immediate relatives." It has also defined immediate relative as spouse, parents, siblings and children. For businesses too, it has said that there must be no mixing of distribution and advice, taking into account holding companies, associate companies and subsidiaries company. Those entities (businesses over individuals) which are in violation of the proposed rules must quit one of the two businesses by March 31, 2019.

Will these new rules achieve the original goal? My guess to that question is 'yes', but not in the shape that SEBI wanted. The fact is that distribution is an established business model while the advisory business is yet to take off as a standalone activity. If these regulations are implemented, then we will effectively have a situation where everyone is a distributor. In other words, status quo.

At the end of the day, the regulator will probably have to admit that distribution is a business while, in India, advice is not. In fact, the function of advice is better fulfilled through an entirely different kind of business. Advice is essentially information, news, analysis and other kinds of content. It's not a financial service and is best served by a specialised media entity like Value Research or so many others, rather than a financial business.