The market regulator, SEBI, has proposed radical changes in the way mutual fund distributors are compensated. SEBI will enforce flexibility and transparency into the commission paid to the distributors.
Many changes are logical. However, they are likely to lead to a deep transformation in the way funds are sold, and I think many distributors will find it difficult to adjust to the new regime.
The distributors (who are now called Independent Financial Advisors) are paid a commission by the Asset Management Company whose funds are being sold. This commission is around 2-2.25 per cent for equity funds.
This is deducted from the invested amount and the investor gets fewer units. The distributor gets the commission from the AMC. Distributors are not permitted to refund any of the commission back to the investors.
But it is an open secret that many investors whose investments are large enough to give them some clout get discounts on the commission in the form of such refunds. Now, SEBI wants to put an end to the practice of fixed commissions.
It wants the actual commission amount to be discussed and settled between the investor and the distributor. SEBI has proposed two methods.
One, there will be a place in the purchase form for writing in the commission percentage that the investor wants the AMC to pay to the distributor. Or two, the investor will separately pay the distributor for his services without involving the AMC. In the second option, the investor will write two cheques, one for the AMC and one for distributor.
However, the newer rules will further increase the transparency gap between the real mutual funds and the faux-funds being run by insurance firms under the guise of ULIPs. It is ironic that fund distributors are getting squeezed on the 2 per cent they earn, while the insurance industry gets away with their 30 or 40 per cent commissions.
These changes make the regulatory arbitrage between an investor-friendly SEBI and a historically industry- and agent-friendly Insurance Regulatory and Development Authority even wider. And that's not good for the investor.
Many changes are logical. However, they are likely to lead to a deep transformation in the way funds are sold, and I think many distributors will find it difficult to adjust to the new regime.
The distributors (who are now called Independent Financial Advisors) are paid a commission by the Asset Management Company whose funds are being sold. This commission is around 2-2.25 per cent for equity funds.
This is deducted from the invested amount and the investor gets fewer units. The distributor gets the commission from the AMC. Distributors are not permitted to refund any of the commission back to the investors.
But it is an open secret that many investors whose investments are large enough to give them some clout get discounts on the commission in the form of such refunds. Now, SEBI wants to put an end to the practice of fixed commissions.
It wants the actual commission amount to be discussed and settled between the investor and the distributor. SEBI has proposed two methods.
One, there will be a place in the purchase form for writing in the commission percentage that the investor wants the AMC to pay to the distributor. Or two, the investor will separately pay the distributor for his services without involving the AMC. In the second option, the investor will write two cheques, one for the AMC and one for distributor.
However, the newer rules will further increase the transparency gap between the real mutual funds and the faux-funds being run by insurance firms under the guise of ULIPs. It is ironic that fund distributors are getting squeezed on the 2 per cent they earn, while the insurance industry gets away with their 30 or 40 per cent commissions.
These changes make the regulatory arbitrage between an investor-friendly SEBI and a historically industry- and agent-friendly Insurance Regulatory and Development Authority even wider. And that's not good for the investor.
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