The recent Securities and Exchange Board of India (Sebi) circular on commission disclosures has the Mutual Fund IFA (Independent Financial Advisor) community up in arms.
Apart from a host of disclosures related to executive compensation at asset management companies (AMC), the circular also mandates that the half-yearly consolidated account statements issued to clients now disclose “the amount of actual commission paid by AMCs/MFs to distributors (in absolute terms”. What’s more, the term commission will encompass gifts, rewards, trips and even payouts such as free research reports, hardware and software.
Just last year, MF distributors were dealt a blow when the passing on of the service tax burden effectively reduced their in-hand receipts by around 14 per cent, and capping the upfront commissions at 100 bps (1 per cent) further diminished their fee incomes.
The implementation of the commission disclosure norms later this year is likely to further impact the motivation of the MF distribution community, which is already on a fairly weak wicket. It is estimated that only one in five registered distributors are actually selling MFs. Many have migrated to selling higher-revenue products such as life insurance, which fetch an intermediary anything from 5 per cent to 35 per cent upfront.
Sebi’s intent behind commission disclosures clearly has to do with protecting investor interest against unethical practices (such as indiscriminate churning). Yet, many are opposing the move on grounds of fairness, calling for similar disclosures to be mandated across financial products. For instance, portfolio management services, insurance products, and private equity funds often attract significantly higher commission burdens, and yet aren’t required to disclose the figures.
The irony is that of all the investment products, mutual funds have the highest potential for long term wealth creation. They are also within the reach of retail investors as they do not have exorbitant minimum investment thresholds. Is Sebi missing the bigger picture here?
“When commission disclosure comes in, existing investors will be tempted to move to direct plans, which will threaten existing distribution and as a result retard entry of new investors, who will continue losing money to chit funds or sub-optimal products,” says Aashish P. Somaiyaa, managing director, Motilal Oswal Asset Management Company.
Amidst the hue and cry, some do see a silver lining. Distributors who choose to stay in the race will be forced to adopt systems and technology that will improve customer experience. Clients are bound to benefit from these developments.
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