Sebi weighs allowing mutual fund distributors to become investment advisers

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Mumbai: The Securities and Exchange Board of India (Sebi) is weighing whether individual mutual fund distributors (MFDs) should also be allowed to hold a registered investment advisor (RIA) licence, as it reviews the regulatory framework governing distribution and investment advice, according to two people familiar with the matter.
“The working group is discussing whether individual MFDs should also be allowed to hold an investment adviser (IA) licence," said one of the two people on condition of anonymity.
It is one of several issues considered by the working group set up by the capital markets regulator earlier this year to streamline norms governing MFDs and RIAs. The group's recommendation would allow individual MFDs to hold dual licences, similar to those held by institutions and other non-individual entities, the person added.
The group was first mentioned by Sebi chairman Tuhin Kanta Pandey in March.
The review comes against the backdrop of a longstanding overlap between mutual fund distribution and investment advice. MFDs, who sell mutual fund products to investors and earn commissions from fund houses, also provide incidental advice on other financial products. However, the scope of such advice has not been clearly defined.
An RIA, on the other hand, provides investment advice to clients for a fee and is permitted to advise on financial products beyond mutual funds.
The recommendation, if implemented, would more clearly codify the investment advice given by MFDs. The norms could also help individual MFDs expand their businesses into advisory services.
India has 1,048 RIAs and more than 100,000 MFDs.
Mint's queries emailed to Sebi remained unanswered.
Pros and cons
Individual MFDs argue that selling mutual funds without giving an investor advice on their other portfolio is often not possible. The concern is particularly relevant when investors have multiple financial products.
An equity MFD may advise on equity products, while an insurance MFD may advise on insurance products; however, the investor may still have to deal with different intermediaries for different portfolio needs.
“If an equity MFD is only allowed to give advice on equity products, while an insurance MFD gives advice on insurance products. An investor needs one advisor or MFD who can recommend a product based on a thorough analysis of the portfolio, combined with advice on how to generate better overall returns," said the second of the two persons.
While allowing individual MFDs to become investment advisors could address the overlap, it would also create challenges, including potential conflicts of interest, dual compliance requirements and higher costs.
“An (R)IA and an MFD would effectively be wearing two different hats. As an (R)IA, they are expected to provide advice without a commission-driven incentive. As an MFD, for the advice they give, they earn commissions from the products they sell,” said a senior RIA on condition of anonymity.
“This could create an incentive to recommend a product that generates a higher commission, even when another product or a direct-plan alternative may be more appropriate for the client. Over time, an individual having both the licences could blur the distinction between fiduciary advice and commission-based distribution,” the person added.
Then comes the compliance costs.
Kartik Sankaran, an MFD with platform Happyness Factory, which manages assets worth more than ₹7,000 crore, said, “If an individual MFD has to gain an RIA licence to give a comprehensive financial plan, it would only increase their costs and compliance. Small MFDs would now need to have a compliance officer, additional documents and record-keeping, which will only add costs.”
To be sure, such compliance costs would only be levied on distributors that also choose to enter advisory.
Another RIA, also on condition of anonymity, said that having a dual licence doesn't solve the underlying problem. “An individual may struggle to manage two businesses, two sets of compliance requirements and two different incentives without mistakes or conflicts,” the RIA added.
Sebi executive director Manoj Kumar said the working group's recommendations have been submitted to Sebi, and final guidelines on the matter will be issued soon, Cafemutual reported on 4 October.

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