Promoting schemes yielding higher commission without paying any heed to risks associated with it is another form of mis-selling.

This happens because mutual fund distributors act in dual capacity—they represent mutual fund houses while pretending to keep the best interest of investors. But this masquerade drops when investors realize they are losing their hard earned money.

Of course, this isn’t a new phenomenon. In fact the capital market regulator—Securities and Exchange Board of India (SEBI) has been trying to curb such malpractices. Recently, SEBI reiterated its stance on keeping mutual fund distribution and the advisory functions at arm’s distance.

As per the revised consultation paper issued on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013, June 2017, there should be a clear demarcation in the advisory and distribution of mutual funds.

The highlights include, the consultation paper recommends that the investment advisers shall always act in the interest of investors and shouldn’t have any ‘reward’ arrangement with the mutual fund houses. Further, advisers must consider ‘product suitability’ as the most important factor when advising their clients on mutual fund investments. They are required to take into account the client’s needs and exercise due diligence. They are expected to demonstrate professional skills and financial-advisory acumen .

SEBI is resolute on pushing for norms in this regard, which may be effective from April 01, 2019.

Although SEBI has proposed to disallow mutual fund distributors from offering investment advice; they can explain the product features to potential investors. Moreover, mutual fund distributors can’t offer any advice on financial planning. That being said, suitability of the product to the investors is their primary focus. 

Before getting investors to invest in a particular scheme, investors must sign a form that confirms that the distributor has disclosed the following:
 

• The list of mutual funds where he is a distributor
• The commission earned or will be received
• Suitability of the product sold to the investor
• Disclaimer that he/she may not be acting in the best interest of investor

SEBI has allowed existing mutual fund distributors to change their goal posts and register as investment advisers, if they wish. In such a case, they will still be entitled to earn the trail commission on the mutual fund schemes they have distributed already.

But, they can’t do any businesses as ‘distributors’ once they registered as ‘investment advisers’. Corporate entities interested in carrying out both the businesses—advisory and distribution will strictly have to operate through two different companies—not subsidiaries—for these functions.

SEBI has tried to plug the easily exploitable loopholes. Immediate relatives such as husband-wife, son/daughter-father/mother, among others can’t act as a distributor/sub-distributor and an adviser at the same time.

Speaking to media about this development, the SEBI chairman, Mr Ajay Tyagi said, “It was felt that there is a need to prevent conflict of interest between advising for investing in financial products and selling of financial products.”

Although segregation of roles is a welcome move, some questions still remain unanswered.

How many Indian investors will solicit services from two separate entities/individuals one for advice on mutual funds, and the other for facilitating transaction?

PersonalFN believes, investors are entitled to only pay for advice and opt for direct plans offered by the mutual fund houses.

There’s also no guarantee that segregation of roles will curb mis-selling. The practical difficulty lies in monitoring the strict implementation of these norms, as and when implemented.

For example, if a person approaches a distributor and asks him/her about the “hot mutual funds”, a distributor may state an oral suggestion—strictly not in the form of advice. The investors won’t have any evidence to prove that, the distributor advised him/her on the mutual fund as well. We can’t deny that most of investors prefer to have financial services under one roof.

At PersonalFN, we have listed down certain dos and don'ts to follow in order to protect yourself and your families from unscrupulous advisors / agents / distributors / relationship managers.

Dos:

• Choose your financial advisor with due diligence
   
• Carry out a thorough background check and analyse the track record and qualifications of your adviser
   
• Read all the investment documents carefully
   
• Read the features and benefits of the investment products, to assess whether they suit your risk profile and investment objectives / financial goals
   
• Carry out at least some basic research
   
• Ask relevant questions to your agent / distributor / relationship manager in context to your investment objective / asset allocation / financial goals
   
• Monitor your investments regularly to know where your investments stand and see whether they are meeting your objectives / financial goals
   
• Take sufficient time while doing your investment / financial planning

Don'ts:

• Don't have blind faith in your agent / distributor / relationship managers
   
• Don't always go by big brand names or star ratings
   
• Don't invest as per any advice given by companies that are not registered with appropriate regulatory bodies
   
• Don't sign blank cheques / forms
   
• Don't blindly believe anyone offering "guaranteed returns" (%) on market linked products
   
• Don't look for ways of making quick money
   
• Don't invest money just because your relatives / friends have invested in schemes

To ensure that you are investing in the right mutual fund scheme, draw up a personalised financial plan. This may help you make appropriate decisions about your investment portfolio. If you require any assistance in creating a financial plan yourself, you can always get in touch with the Certified Financial Guardian (CFG) in your vicinity. He/she can help you address all your financial queries. Or you can you can reach out to PersonalFN on 022-61361200 or write to info@personalfn.com.

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