September 28, 2016

How IFAs can Face Commission Disclosure – Communication is the Key

Sadique Neelgund

How IFAs can Face Commission Disclosure – Communication is the Key

SEBI has made it clear that commissions of distributors will be disclosed in investors’ CAS (Common Account Statement) from October 1st onwards in absolute numbers. Although I think this could have been well avoided by the regulator, I do not want to get into a critical review of same. Network FP Members had a very good discussion on this matter last week and I am writing this based on some of the learnings from that healthy discussion.

October 1st is just a few days away and I think impactful & genuine communication will be the key to overcoming this problem effectively. In this article, I am sharing a draft of the letter which you can send across to you all your clients or use it as a script to speak to your selected clients.    

But in the first place, know that for good quality advisors, the situation is not as bleak as you might be thinking of it. Secondly, with some proper strategies, you should be able to get through this situation. Also, kindly note that the commissions paid for last six months against each scheme will get reflected in CAS, which means you have to keep creating and communicating the value you have added in the last 6 months.

In general, my observation has been that IFAs in India are excellent value creators (amazingly good at it) but relatively poor communicators. Currently, majority of the communication happens through an automatically generated portfolio report which focuses on returns. Clients’ needs to be softly told the value we add to their life which can never be quantified or measured. But advisors spend quite a lot of time and efforts in delivering that ‘value’.

The impact of Commission Disclosure will differ from advisor to advisor and from client to client. Higher the value added by an IFA, the lesser s/he has to worry. And vice versa. Higher the ticket size of the client, the higher an IFA has to worry. And vice versa. Below is a simple graphical representation of impact of Commission Disclosure on IFAs.

Impact of Commission Disclosure on IFAs

Impact of Comission Disclosure on IFAs

In majority of the cases, say for clients with less than 25K SIP / 25L Portfolio, commission disclosure will not be a concern for IFAs who are offering value beyond mere transaction facilitation. So in case you are catering to this category and adding value, you should not be worried. With some minimal communication, you will be able to sail through the situation.

IFAs who are catering to mass affluent & HNI category, have to carefully make an effort to communicate and tell them what’s coming and what does it mean. The last thing an IFA can do is give unpleasant surprises to clients. And it’s always better to be proactive than being reactive.  

We all know how much of value we add to clients lives and the host of costs/expenses we incur in our practices / business. MF Advisors need to communicate the same effectively. Below is the draft of the letter which you may edit as per your practice structure / your offerings / your thinking and send it to your clients before October 1st. Also use the script to communicate to key clients over a phone call or in-person meeting. Feel free to use it and share it with other IFAs. 

—–Start of Letter—–

Subject: Commission Disclosure in Common Account Statement

Dear <Client Name>

The regulator, Securities and Exchange Board of India (SEBI) has come out with a regulation which will ensure the commissions paid by Mutual Fund companies to financial advisors will be published in the Common Account Statement (CAS) sent to investors on a half yearly basis starting October 1st, 2016.

While this is a good move to bring in transparency and accountability, the numbers in CAS will tell you only the half the story. Hence, I wanted to take an opportunity to communicate the value we add to your life as a financial advisor and what are the various costs we incur to give you a great ongoing service. We request you to make note of the following while reading the payments we get in your CAS;

Value we Add

Please know that for the income we are earning from our clients, we continuously attempt to do the following value addition to our clients;

  1. We help you organize and unclutter your financial life
  2. We understand, analyze and help you invest for goals in life
  3. We will stay with you till you reach your goals in life
  4. We help you avoid emotionally driven decisions around investments
  5. We help you to be financially prepared for emergencies and transitions
  6. We will stand by your family in case of emergencies
  7. We educate you on the do’s and don’ts of money management
  8. We help you do consistent and increased regular savings
  9. We encourage you and help you invest regularly
  10. We do Asset Allocation & Portfolio Rebalancing on a regular basis
  11. We help you select the top schemes from the thousands of Mutual Funds in market

Costs we Incur

Please know that, the income earned from our clients goes towards the following costs / expense heads;

  1. Financial Advisors’ Salary / Remuneration
  2. Support Team Members Salaries
  3. Financial Advisory Softwares and Technologies
  4. Knowledge Upgradations Programs, Workshops, Conferences
  5. Investment and Rental of Office Infrastructure
  6. Travel and Logistics Costs
  7. Stationery Costs
  8. 15% Service Tax is paid out of income
  9. Income Tax is paid out of the income
  10. Plus, we need to make nominal profits to keep the firm healthy and growing

Hope you will appreciate the efforts being put in by us, the costs we incur and the value we add viz.a.viz income we earn from you.

I will be happy to speak to you for any further clarifications on this matter. We look forward to continuing delivering great service, help you take informed investment decisions and achieve your family’s life goals.

Yours truly,
<Advisor Name>

—–End of Letter—–

Download in Word – Letter to Clients – Commission Disclosure


17 Thoughts to “How IFAs can Face Commission Disclosure – Communication is the Key”

  1. Avatar ANIL SALVI says:

    Excellent draft Sadique, Hats off to you. Certainly, we need to communicate,

  2. Nice work done by you Mr.Sadique Neelgund.

  3. Avatar Kishor Kale says:

    Thanks Sadique,

    Very well drafted letter and all your points are really eye opener to the IFA’s like me, many time communication is the problem and hence charging fees becomes difficult. Few days back one of my big ticket size client ask me about why I am charging fees and then I write reply to him explaining all the types of work we do for managing his portfolio and now he agrees to pay fees.

    I like your letter, with your permission I will add it for my future communication to our clients

    Thanks Again

    Kishor Kale

  4. I really don’t understand, how the idea of disclosing the commissions paid to the mutual fund distributors to the clients comes in the mind of SEBI officials. There is no logic at all to this on following grounds.
    1. SEBI has classified two services vis. product distributors and financial adviser, wherein adviser will only receive fee as his / her income and distributor will receive commission from product manufacture i.e. AMC in case of mutual fund distributor. So, in case of mutual fund distributor AMC pays the commission from the expenses ratio of the mutual fund scheme under the prescribed limit of SEBI and the expense ratio is already disclosed in mutual fund scheme documents. In view of this there is no validity of disclosing commissions paid to mutual fund distributors to mutual fund purchaser from any distributor.

  5. Avatar Bhoopendra Saran says:

    At last I have found a forum where we ca8
    n organise and make our voice heard to proper authority. We are aducating our clintes on their investments via mf need based goals. No problem if they know about our commission
    No àrmy can fight with

  6. Avatar binoj says:

    Good initiative Sadique Neelgund.

  7. Avatar Narayan says:

    Appreciate Sadique. Its better to be expressive than hide it… Thanks

  8. Avatar financeguru says:

    Can amfi propose a regulation to sebi for disclosure of mr u k sinha salary in all stmnts. ???

  9. Avatar Tul Bahadur Karki says:

    Thanks Mr. Sadique for drafting a sound letter describing a role of an advisor and his financial commitments and also pain. Thanks for caring to all.

  10. Avatar Deepak K Jain says:

    Thanks for doing this Letter & Update the Changes of Industry.

  11. Avatar v srinivasan says:

    Thanks and good draft

  12. Thanks for doing this letter and update the changes

  13. Avatar Vaibhav Srivastava says:

    nice suggestion

  14. GOOD DRAFTING !! IT WILL HELP US TO COMMUNICATE WITH OUR CLIENTS

  15. Avatar minecraft says:

    Appreciate this post. Let me try it out.

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