Industry Trends

Only 3 questions for Mr. U K Sinha

Vijay Venkatram, Managing Director, Wealth Forum

12th January 2017

In a nutshell

The industry is awaiting the final RIA regulations, which we believe may come this month. Some rumours suggest that this may be one of the items on SEBI Board's agenda for its meeting on Jan 14th. A lot has been discussed and debated on the merits of SEBI's proposed changes to the RIA regulations. As SEBI's Board gets ready to deliberate and approve these regulations, we urge Mr. Sinha and SEBI's Board to consider these 3 questions - answers to which may give them some sense of what could be the unintended consequences of the regulations, as currently proposed.

What will SEBI really eliminate? Conflict of interest or small IFAs?

The entire thrust of the RIA guidelines is about eliminating conflict of interest in the advisory process when intermediaries guide investors on their investments. Lets consider some facts:

Total commission paid out in 2015-16 was Rs. 4755 crs. 100 leading banks and NDs account for 65% of total commissions paid out while 40,000+ IFAs account for the balance 35%. Out of the estimated commission payout to IFAs of around Rs.1600 crores, the top 500 - who have the team size and critical mass that can enable them to set up hybrid structures to pursue both distribution and advisory - account for around Rs.600 crores of the Rs.1600 crore commission payout. That leaves 40,000 individual IFAs who collectively earn Rs.1000 crores as commissions (only 20% of total commission payout) - who will need to make a choice between MFD and RIA. It is these individual IFAs who will be significantly impacted by the "no incidental or basic advice" regulation, and who will therefore become uncompetitive in the market as MFDs and unviable in the market as RIAs. Effectively, 80% of business will continue to be done on a commission payout basis, even after the proposed RIA regulations are introduced. What therefore is SEBI really going to eliminate consequent to the proposed RIA regulations? Commissions - No. Conflict of interest - No. Small IFAs - Yes.

Will SEBI reduce or increase mis-selling risk?

Eliminating conflict of interest tackles mis-selling risk and SEBI believes its RIA proposals will achieve this objective. Consider this perspective:

Leaving out the top 500 IFAs who can potentially adopt a hybrid model of distribution and advice (and who can therefore continue to run viable business models), the balance 40,000+ IFAs earn an average annual gross commission income of Rs.250,000 - which will work out to less than Rs.20,000 per month net of expenses. This is the revenue after a 3 year period where industry assets have doubled while IFA numbers have not. So, we are talking about revenue numbers in a favourable market environment. Are these the people who represent high risk to investors by making huge amounts of money for themselves through sale of high commission unsuitable products? If this set of distributors fade away due to the proposed regulations, and their place is taken by larger firms with hybrid structures, and we know that larger players actually get substantially higher commission rates than the smaller players - are we reducing or increasing risk of mis-selling driven by commissions?

Exactly how does SEBI expect a distributor to sell a SIP?

The biggest retail success story for the MF industry is growth in SIPs. 1 crore live SIPs and a monthly SIP book accretion of Rs.4,000 crores are indeed a phenomenal achievement and a true win win for the industry and for investors. Karvy's data suggests that 94% of SIPs are distributor driven and only 6% are direct. This is the situation 3 years after direct plans have been introduced.

An investor typically needs to find answers to these questions before commencing a SIP:

1. What is the right amount of a SIP for me?

2. What is the right period for which I should commence a SIP?

3. Which asset class should I consider for my SIP?

4. Which is the right fund within the right asset class for my SIP?

The answers for the first two questions come from a goal based planning exercise, the answer for the third comes from risk profiling and the answer for the fourth comes from fund research and fund selection.

If a distributor is not supposed to offer any basic or incidental advice, not supposed to get into even a basic goal planning exercise, not supposed to do risk profiling and not supposed to make any fund recommendation, then how exactly does SEBI want a distributor to sell a SIP? Exactly how does SEBI believe investors will get to the right answers for these 4 questions? 94% of SIP investors choose to get these answers today from their distributor, 3 years after direct plans have been introduced. Where will they go for these answers, when the new regulations are enforced?

My humble submission to Mr. Sinha and SEBI's Board is to please reflect on these 3 questions, and then take your decisions in the genuine rather than perceived interests of investors.

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