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Jul 17, 2017 05:57 PM IST | Source:

Why SEBI’s investment advisory regulation is a step in the right direction for mutual fund investors

The Securities and Exchange Board of India (SEBI) has spelt out clear demarcation between the two, wherein a distributor is someone who sells commission-laden mutual funds

Kamal Manocha

When it comes to consumer buying behavior, most of us are hooked to the product and the service itself. We do not really care or try to find about the distributor of that product or service, do we? But, it is the opposite in the case of mutual funds where the distributor is considered to be an important intermediary and impacts the product buying behavior. The reason for this is the fact that an investor believes a mutual fund distributor to be his ‘Advisor’. And, given that most investors look for advisory assistance, an advisor obviously commands an important mind space.

However, in mutual fund parlance these two words are often used interchangeably by the industry, but there is a lot of difference between a ‘distributor’ and an ‘advisor’. The Securities and Exchange Board of India (SEBI) has spelt out clear demarcation between the two, wherein a distributor is someone who sells commission-laden mutual funds. On the other hand, an advisor is someone who obtains a RIA (Registered Investment Advisor) license from SEBI and by fiduciary law can’t charge commissions and earns solely through advisory fees.

The reality is that most investors are unaware of this as almost all distributors call themselves financial advisors. This leads to investor confusion and poses an industry level problem. This issue is as grave as a chemist who calls himself a doctor. Imagine in a scenario such as this how will a patient find out who is really a licensed doctor and who is just calling himself a doctor without possessing a proper license?

Hence, SEBI’s recent step of issuing a consultation paper to revise investment advisory guidelines is a welcome move and one that is in the favour of investors. Targeted to bring in clear distinction between an advisor and a distributor, this step is intended to bring in fair competition and transparency.

SEBI has been time and again taking initiatives in this regard, and had first introduced advisory guidelines back on 1st January, 2013 along with the introduction of direct plans. Last year in October, it had issued its first consultation paper and the recent consultation paper is amalgamation of all past feedback.

Going forward, SEBI doesn’t want distributors of mutual funds to use the nomenclature of “independent financial advisor” or “wealth manager” if they do not obtain the status of an RIA. Most distributors, in the past, have avoided getting advisory license as this implies getting into a fiduciary engagement of a non-commission system with a client.

From our previous example, a licensed doctor operates under a fiduciary law and cannot principally earn from the medicine he or she prescribes, but is free to ask for a fee for the advice. Similarly, a SEBI-licensed RIA can’t charge a commission from an investor and is bound by law to only deal in direct mutual fund plans.

The unlicensed advisors are keeping their business models away from the rules of advisory, and offer a free advisory service to investors, but earn commissions from AMCs who in turn adjust these from an investors fund value. This brings in bias and potential conflict of interest.

Thankfully, of late there are quite a few companies that have taken a step in the right direction of obtaining advisory license from SEBI. They offer a fee based advisory and offer commission free investments in mutual funds. Investors benefit because they get to experience true and unbiased advisory free from hidden commissions.

At Bharosa, we fully understand the value of advisory and have taken it to the next level by creating a bionic advisory product. We found that bionic advisory is actually the need of the hour and the best form of advisory as it’s a combination of a "human advisor" and an "analytical engine".

It’s heartening to see SEBI’s initiatives lately, and it rightly expects investors to make an informed decision and has hence invited for a public opinion on the consultation paper.  It is only if investors understand and support these initiatives and learn to adopt superior fee based approach, will distributors actually get pushed to obtain the advisory license.

Ultimately, if investors are made aware of the magnitude of the hidden price they are already paying, investors will learn to pay a fee which is rational. And, in fact if this magnitude of commission expense gets rationalized, distributors will learn to take the mandated advisory license.

Intermediary plays an important role in this industry and thus it becomes utmost important for it to operate as per regulatory guidelines and the first step towards it is obtaining an advisory license.

Author is CEO, Bharosa Advisor

Disclaimer: The views and investment tips expressed by investment experts on are their own, and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.
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