The nature of commissions for financial products will soon undergo a change as the Securities and Exchange Board of India (Sebi) comes out with the draft guidelines and subsequently the final norms.
On Tuesday, Sebi chairman UK Sinha had indicated that regulations on investment advisors would be out soon. One point on which financial distributors are not clear is whether they will continue to earn trail commissions on mutual fund products sold by them. Some claim it would not be possible to maintain all audio recordings of the advice given while others believe that the minimum qualification of a CA or MBA, may prove to be an entry barrier.
Surajit Misra, national head, Bajaj Capital says, ?It will be cumbersome for advisors to keep records since some clients visit us almost daily. Keeping a record of all conversations will be difficult.?
Meanwhile, intermediaries believe that the rules which would require advisors to charge their customers directly for their services, should not be implemented immediately. Such a move, they point out, would hurt their business since typically clients are not in the habit of remunerating advisors. Says Pankaj Mathpal MD at Optima Money Managers, ?Sebi has done the right think in differentiating between between agents and advisors. But in India, it will be difficult to charge investors directly and that would hurt our business.?
In late September, the capital markets regulator had come out with a concept paper that attempts to resolve the conflict in the dual role played by distributors. The Sebi paper noted: ?The conflict of interest arises when dual role played by distributors as an agent of investors as well as of the manufacturers. So they receive their payments from two sources, commissions from the manufacturers and advisory fees or other charges received from the investors. This prevalence of divided loyalties may not be in the best interest of all the stakeholders concerned. They would happily churn investors? portfolio and also squeeze more commission from the manufacturer.?
The market regulator feels, ?The person who interfaces with the customer should declare upfront whether he is a financial advisor or an agent of the manufacturer.?
Further, Sebi has noted that if he is an advisor, he would be subject to the investment advisors regulations and would receive all payments from the investor and there would be no limits set on these payments.
On the other hand, there will be agents who will be associated with the manufacturer and would receive their remuneration from them.
However, they will be prevented from styling themselves as financial advisors and will have to call themselves as agents only.
In October, financial advisors responded to Sebi?s paper saying the proposal needed to be held back for a few years.
?Sebi should give us 3-5 years as a transition phase so that intermediaries earn from past trails before moving to a 100% fee-based advisory model,? Financial advisors wrote to Sebi.