 "Are MF investors ready for advisory-based model?")
Pandey is not alone in thinking so. The MF sector is grappling with the rapid changes on permitted commission structures. The product continues to remain a 'push' one, with investors, typically, not coming forward unless approached and persuaded. Hence, say sector officials, the continuity of incentives like upfront and trail commission should not be tampered with.
Amid this, the question is whether MF investors are ready for an advisory-based model. This newspaper spoke with chief executive officers (CEOs), distributors, advisors, independent market experts and new retail (individual) investors. Almost all say time is needed for evolving to such a model.
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At a recent discussion forum, Dhruv Mehta, chairman of the Foundation of IFAs, said: “From an advisor’s point of view, it is unfair to say you can't do both, advisory and distribution. I do not see the advisory model taking off unless Sebi enforces it...in the next three years, there might not be much change.”
Of a 1.25-billion population, barely 10 million are MF investors, a penetration of less than one per cent. Therefore, it is a no-brainer that this penetration will increase. This can be achieved, experts say, with the help of IFAs. For that, they need to be incentivised well.
According to A K Narayan, president of IFA Galaxy, “The regulator might be trying to prepare India for an advisory model. However, an MF is a 'push' product and no one is coming for advice. The regulator's thinking is good but the timing is wrong. It will take at least three to five years to see an advisory-based model take off.”
Chief executives in the sector suggest both — advisory and distribution — have to co-exist. “If the regulator wants only advisory, it will disrupt the market. Payouts to distributors in the form of upfront and trail (commisions) can’t be done away with in a hurry. At the same time, there is a need to re-look at the regulations on investment advisors,” says one.
According to Neeraj Choksi, joint managing director at NJ India Invest: “If advisory is enforced, a lot of customers would be under-serviced. (One needs to) Look at it practically, not philosophically. Advisories will happen in the future but not at least in three years.”
Dhirendra Kumar, CEO at fund tracking firm Value Research, says: “The regulator's moves are logical and advice is needed to grow the market. However, optimum time needs to be given for the change. Swifter changes might bring disruptions.”
About 100,000 distributors are registered with the Association of Mutual Funds in India (Amfi).
Sector officials say only a tenth of them are active. If a distributor brings at least one application a month, he is considered active. In Amfi guidelines, upfront payment is capped at 100 basis points for a period of 36 months for a Systematic Investment Plan. It is up to the fund houses to decide payment by either upfront or trail or a mix of both. Further, from this October, investment statements to investors will include the commission payout to the distributors.