Money Guru | Less agent fee helps the savvy; small investors get left out

Posted: Tue, May 1 2012. 7:04 PM IST
Kayezad E. Adajania

Using Fifa as a platform, IFAs can come together and can collectively organize knowledge forums on topics that we think are relevant to us

Independent financial advisers selling financial products to retail investors want to be heard. Having seen their incomes squeezed due to the regulatory changes in the mutual fund (MF) industry in the past three years, some MF distributors have decided to come together, make a forum and present a collective voice. The Foundation of Independent Financial Advisors (Fifa) was set up in February 2012 to provide this platform. Fifa aims to help enable an environment that will make it viable for financial advisers to reach out to retail investors and also to educate and develop IFAs themselves, says its chairman Dhruv Mehta.

What drove you to form the Foundation of Independent Financial Advisors (Fifa)?

Dhruv Mehta, chairman, Foundation of Independent Financial Advisors.

Dhruv Mehta, chairman,
Foundation of Independent Financial Advisors.

The association gives a learning platform to independent financial advisers (IFAs). Using Fifa as a platform, IFAs can come together and can collectively organize knowledge forums on topics that we think are relevant to us.

Also, over the last three years, there have been many regulatory changes in the Indian MF industry. A lot of these changes have been driven by what has been happening on the institutional distribution side, such as banks and national distributors. There could be malpractices on the IFA side as well but, maybe, a lot of malpractice that the Securities and Exchange Board of India (Sebi) was trying to address was happening in other distributor segments. Which is right, but it ignored the ground realities of how an IFA worked.

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Dhruv Mehta talks about what drove him to form the Foundation of Independent Financial Advisors (FIFA) and the challenges faced by IFAs in India.

It’s perhaps easy (for Sebi) to meet say about 10 national distributors, or call two or three large banks to discuss. But that sort of interaction was not happening with us. When Sebi thought of abolishing entry loads in 2009, some IFAs came together, drafted a common email voicing their opinion, and sent to Sebi from their email IDs. Somehow Sebi did not recognize that and said that was just one email sent from multiple IDs. That did not turn out as we’d expected. That was when it occurred to us that a common forum is required for IFAs.

You seem to be giving a clean chit to the IFAs. Surely, there are malpractices, we hear, even in the IFA segment.

Sebi’s decision to abolish entry loads was based on its observation that malpractices are there in the system. Churning happens, I am not denying. But statistics show that a significant chunk of this churning happens in the banking channel. It is there in the IFA segment, but to a much lesser extent.

Sebi believes that the MF distributor is an agent of the investor and hence should take the payment from him. He does not work for the manufacturer.

This is a hybrid system. The distributor’s role is to connect customers and the manufacturer. In an intermediation, sometimes the broker will act on the buyer’s behalf and sometimes on the seller’s. If you prescribe that he should act only on behalf of the customer, then all distributors should become advisers. Then, there should be no distributors.

In reality, we have both advisers and distributors. Even customers want a choice. Some of my high networth clients (HNIs), for instance, only want my staff to go to them, pick up their application forms, run to the MF offices and just get the money invested. They don’t want my advice. So he won’t pay me advisory fees. Some customers want my advice. But entry load abolition has only helped HNIs; small distributors may not find it feasible to go to the small guy and collect a fee for his already small investment.

How does Fifa want to make a difference?

We want to address the lack of retail participation in MFs. MF folios are coming down; the assets under management of the MF industry are not growing. On the contrary, gold as an asset class is growing, but people can invest today in gold without being compliant to know-your-client regulations. In the quest to make the system transparent—which is of course the right thing to do—we have squeezed margins of IFAs.

But these guys can reach out to retail investors and explain to them the importance of investing in equities and debt, rather than, say, gold. That can only happen if there is a strong number of people (distributors) who are ready to work; provided there is enough remuneration. Reducing distributor margins will help smart and savvy investors who can make their own decisions; the small investor gets left out and ignored.

Do you think IFAs are misunderstood?

Not misunderstood, but there is a lack of understanding on what they do. It’s not just about advice; there is a lot of handholding to be done of the small investor. The fund house needs to align his remuneration policies depending on which distributor brings him long-term assets, short-term assets and so on. Whether it wants to give upfront fees or doesn’t, it is in the best position to decide. By changing the rules of the game from the very top, it might have brought in more transparency, but clearly access to the small investor has reduced. All modes of distribution need to survive and each one would work differently.