Mutual fund distributors are unwilling to adopt Registered Investment Adviser, or RIA, model even after more than five years of this model coming into force. This is evident by the low registration numbers. Currently, there are roughly 1,093 RIAs registered with Securities and Exchange Board of India, or, SEBI.
“Of 1,093 RIAs, around one-third, which is roughly around 350 or 400 are actually into financial planning and wealth management practice. The rest of them are into stock tips/research. In fact, many of them haven’t even started the practice after taking the RIA license. Of 400 RIAs who are into financial planning, less than 100 practice fee-only advisory. The rest of them would have distribution as parallel setup to RIA model,” Sadique Neelgund, Founder of Network FP pointed out at the recently concluded Morningstar Investment Conference.
Association of Registered Investment Advisers, or ARIA, recently conducted an online survey among 720 mutual fund distributors across India to understand the thinking of mutual fund distributors about the RIA regulations. The survey found that regulatory uncertainty and unwillingness of clients to pay fee as the primary reasons for distributors not transitioning towards the RIA model. Of 720 distributors who were surveyed, 40% or 279 respondents have completed more than ten years in their practice.
“Mutual fund distributors have an established business model with a steady stream of income which they might not be willing to sacrifice by adopting a new model like RIA. Large distribution outfits have a cost structure and if clients are not willing to pay fee, it will deter distributors from making that transition. Moreover, there is regulatory uncertainty on whether we can offer both advisory and execution services,” says Vinod Jain of Jain Investments.
Hybrid model
42% advisers said they would apply for RIA license if they are allowed to practice hybrid model - advice and execution. Under the current regulations, mutual fund distributors are exempted from registering as RIA. Also, investment advisers who are body corporates are permitted to offer execution services through a subsidiary identifiable department or a subsidiary and they should maintain an maintain arms length relationship between its activities as investment adviser and distribution or execution services. However, a January 2018 consultation paper floated by SEBI proposed that individuals as well as other entities like NBFCs, Body Corporates, LLPs can choose to provide only one service – distribution or advisory. The regulator had given a timeline of March 2019 for distributors and advisers to make that choice. Industry experts say that this proposal made distributors wanting to become RIAs wait on the sidelines. Until now, there has been no further direction from SEBI. Thus, regulatory uncertainty is said to have created doubts in the minds of RIAs as well as distributors.
Mechanism to charge fee
11% respondents said that they would apply for RIA if there is a suitable mechanism to charge fee from clients. Clarity on the future roadmap, lower net worth criteria, lower license fee, less compliance requirement and lower qualification criteria were some of the reasons which would make MFDs embrace the RIA model.
That said, there still appears to be some unwillingness to adopt the RIA model. More than 50% respondents said they would not apply for RIA even if the conditions were favorable. “In markets like USA, advisers can charge fee on the platform. In India, there is no such mechanism to charge, calculate and collect fee,” points out Jain.
RIA detrimental for retail clients?
More than half (53%) respondents feel RIA regulations will specifically be detrimental to clients in B30 cities and small retail clients. One of the reasons for this could be that RIAs would tend to focus on mass HNI clients by ignoring retail clients who may not be willing to pay fee for advice. “In India, the main issue is penetration of mutual funds. A handful of RIAs cannot reach out to a large population of India. Thus, we need all kinds of players in the industry,” believes Jain.
Fee
Going by the survey results, it seems that that a large majority of MFDs feel that their clients may not be willing to pay fee for advice. An overwhelming 74% MFDs said that less than 10% of their clients are ready for pay fee. Another 15% MFDs said around 10-25% clients are ready to pay fee. “In smaller towns, even a MD doctor with an experience of 30 years offers his advice for Rs 100-150. So imagine how difficult it would be for advisers to collect fee in smaller towns. Even if they pay in the first year, it could become difficult to collect fee in the subsequent years, especially when they see negative returns,” says Warangal (Telangana) based distributor Shiva Prasad Konduru.
Does upfront cap nudges MFDs towards RIA?
In a bid to discourage churning and mis-selling, SEBI has done away with upfront commissions. Further, the rationalization in expense ratios has impacted the commission payouts of distributors. When asked if they would consider becoming RIA in light of these changes anytime sooner, 40% respondents said they would not while 36% were unsure. Only 11% MFDs felt they would transition to RIA due to these regulations.
The association has shared the survey responses with SEBI. Registered in 2019 as a nonprofit organization, the association aims to establish best practices for RIAs, help RIAs comply with regulations, liaison with regulators and industry on behalf of RIAs and grow the RIA community in India. The ARIA interim managing committee members consists of Lovaii Navlakhi, Suresh Sadagopan, Harsh Roongta, Rajendra Kalur, Renu Maheshwari, Vishal Dhawan and Vivek Rege.
