Transparency in Mutual Funds

On Friday, SEBI came out with a Circular detailing among other things

1. The amount of actual commission paid by AMCs/Mutual Funds (MFs) to distributors (in absolute terms) during the half-year period against the concerned investor’s total investments in each MF scheme. The term ‘commission’ here refers to all direct monetary payments and other payments made in the form of gifts / rewards, trips, event sponsorships etc. by AMCs/MFs to distributors.
2. The scheme’s average Total Expense Ratio (in percentage terms) for the half-year period, of both direct plan and regular plan, for each scheme where the concerned investor has invested in.

This has really set things abuzz among the IFA folks who believe that this spells death for many of them given the fact that now the customer is empowered with the knowledge of what he is paying for the advice he is receiving, he may not really be quite keen on continuation of the service as it stands.

Some time back, SEBI decided to differentiate between an Adviser and a Distributor. An Adviser while could charge a fee could not take advantage of the commission paid by the AMC. The basic idea here was to ensure that by de-linking the adviser’s income to products he sold, a adviser wouldn’t sell products not suitable for the investor. But given the fact that Distributors were given a free run where they could (and a leading site that enables investment in mutual funds) still claims and I quote “The smartest way to invest in Mutual Funds and more – For FREE!, it was a tough issue for any adviser to ask an investor to pay when he could supposedly get the same for free.

To overcome this, many a RIA just placed their distributor code under a different entity making it seem that they provided the advice for Free when it clearly was not happening since many of them did not even enable investors to invest in “Direct” rather than “Regular”.

The biggest concern among IFA’s is that this method (of not making the client know what the IFA is getting paid) was the best since we “Indians” supposedly do not wish to pay for advice. Yes, we would love to get things for free (who doesn’t), but if there is a way to evaluate and showcase why paying for advise maybe worth the investment, a lot of those who weren’t ready will have a change of heart. That doesn’t mean everyone will do, but who said changing opinions is easy.

Syms, an off-price clothing store in New York, says, “An educated consumer is our best customer.” I have friends who are happy to go with a distributor since he provides them with evidence backed data on what funds are good investments and what aren’t. If a distributor is providing value and has nothing to hide (after all, no one expects anyone to do anything for Free), I find no reason as to why should this new disclosure bother him. The only guys who would be stumped are those who were claiming to do a free service while riding piggy back on the commissions.

As to those who claim that without the distributor, Mutual Funds will not be able to penetrate in a big way, I would like to read this short story “The Old Lady of Somanahalli”