July 1, 2019

Advisory and Distribution can Co-exist under One Roof

Sadique Neelgund

This short note is to help financial advisors appreciate the importance of why advisory and execution/distribution should and can co-exist under one roof. And how to make it work by addressing the ‘conflict of interest’ issue.

And encourage financial advisors to share the note with their respective associations, other influencers and even to regulator.

Its time to take a proactive approach in solving the regulatory bottleneck / deadlock over the investment advisory regulations which is affecting majority of the MFDs & RIAs impending the growth of profession.

Underlying Assumption

Regulatory framework should help Indian Investors get access to competent, unbiased & cost-efficient financial advice to help them achieve investment objectives and life goals.

This can be achieved by allowing Financial Advisors (individual & corporate) to operate as advisors and as well as distributors offering both advisory and execution services under one roof.

Why Co-Existence is Needed

1. Clients are of different types – HNI Vs. Retail, Informed Vs. Uninformed, Direct Vs. Regular. A financial advisor comes across all of them and should be allowed to serve them all.

2. Clients preference to pay fees varies – Separate Fees Vs. Embedded Fees i.e commissions. A financial advisor comes across both categories and should be allowed to serve them. Investor should be given an option how she wants to compensate her preferred financial advisor.

3. Clients prefer to work with one single entity instead of going to different entities. A financial advisor should be allowed to create that kind of entity which is in the interest of the both.

4. Dwindling MF commissions is unfeasible for small and new MFDs to operate. Meagre Fees of RIAs making it unfeasible for small and new RIAs to operate. This will also lead to small retail investors being unserved.

5. Independent Financial Advisor is also capable of doing both RIA & MFD practice with separate set of processes, record keeping and adequate disclosures.

Recommended Regulatory Framework

1. Allow individuals to register as both RIA and MFD just like corporates can do currently based on their competence and aspirations.

2. Allow MFDs to offer embedded, elementary and goal based advisory services without charging fees.

3. Reduce the RIA registration fees for Pvt. Ltd. Cos (small boutique firms with less than 30 Employees)

4. Don’t allow complex investment products to be sold or recommended without some licenses

5. Explore possibility of Single SRO for all investment intermediaries (RIAs, MFDs & more)

How to Make Co-Existence Work

To minimise conflict of interest and protect investors

1. Ask for full Transparency & Disclosures from Financial Advisors running both practices.

2. Financial Advisors doing both practices to disclose total revenues earned to clients.

3. Ask for Clear Segregation (process & records) from Financial Advisors running both practices

Do share this to other financial advisors if you find merit in the reasoning and recommendations.

3 Thoughts to “Advisory and Distribution can Co-exist under One Roof”

  1. This clarity is needed as of yesterday..

  2. Chandrashekhar kabrq says:

    The regulatory changes affecting Mutual fund Distributors all over the country is serious issue at a time when jobs/SME/Medium enterprise is buzz word. Four imp issues worth debating and extremely imp for MF industry and its constituents. 1 why GST is not applicable on Investors when they invest in MF – they readily pay in all other financial instruments. 2 Why no unanimous rules and regulations for investments in financial avenues like Insurance /MF/Equity/FD and small savings all under different regulators. 3 is there any accountability in markets where scams/rating agencies/auditors/banks/exchanges are hand in gloves. 4under these circumstances with so low penetration in market are the investors ready to pay fees to the advisors in any sustainable way so this profession attract new talent. 4. The advisors with two decades of experience in distribution must be rewarded with more incentives and commission if they spread investment awareness along with marketing. 5iits impossible to charge fees in such a disorderly market which is still to mature with no depth and open to exploitation.

  3. Deepesh S says:

    I totally like the idea for individuals to register as both MFD as well as RIA. In fact for such individuals a better rule can be created for e.g. AUM up to 25 lakhs per PAN can be served as MFD while above this limit can be compulsurily served as RIA. Hence it will be easy to serve new and small investors on commission basis while large investors can be served on fee basis.

    So as MFD he dont have to do anything additional for transparency as everything is already disclosed on CAS while for the RIA part, revenu details can be submitted to respective organisation. (Segregation)

    So there is nothing additional required to disclose on revenue part to clients. As anyways IFA revenue information is useless information for investors.

    So all three fronts can be happily covered with this as:
    This will surely help existing MFD to look to become RIA and give a thought for going as fee based for certain clients.
    This will help new RIA to start small by earning commision money on regular basis.
    This will cover all kind of investors new, old, small, big and so on.

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