What’s in a name? Adviser versus Distributor

By Ravi Samalad |  20-02-20 | 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

In financial services industry, the laundry list of terminologies used to describe intermediaries can be confusing for investors - independent financial adviser, wealth manager, financial planner, wealth adviser, distributor, broker, agent, financial consultant. To end this confusion, SEBI has asked distributors not to use the term ‘Wealth Adviser’ or ‘IFA’ unless they register as Investment Advisers. The market regulator had stated its intention for barring distributors to use the term ‘adviser’ in its previous consultation papers as well.

We spoke to a few mutual fund distributors to understand how it would impact them. Some say that it would take a long time for retail investors in India to discern the services provided by different intermediaries. “SEBI should do something to enhance the knowledge of investors. Investors can’t discern between different nomenclatures like IFA, agent, adviser or wealth manager.  Whatever you call, investors value the services we provide. Relationships matter more than the nomenclature,” says Rajesh Hattangady of THiiNK.

Some distributors are of the view it would impact their perception among investors in the long run. “We have not been using the term IFA, adviser, or wealth adviser in any of our marketing material. Clients expect us to provide them holistic planning. We are not merely here to submit applications to R&T offices. In the long run, it could change the perception among investors. This will benefit large players and could impact the perception of small distributors among investors,” says a Mumbai-based distributor.

More clarity is awaited from SEBI on whether distributors have to rebrand their company names. Many distributors have used the term ‘wealth’ or ‘adviser’ in their company name. A cursory search on AMFI website shows that 856 distributors have used the term ‘Advisor’ while 18 ARN holders have used ‘Adviser’.

Some say it will be business as usual as their clients appreciate the value they get. “It won’t make much difference. Not many distributors use the term ‘IFA’. It is being done to distinguish the services of RIAs. Whatever name we call, the experience of investors doesn’t change whether they deal with RIA or distributor. We are awaiting clarity on whether we have to change our company name in light of the new regulations,” says Saurabh Mittal of Circle Wealth Advisers.

Meanwhile, RIAs commended SEBI’s move. “Distributors are agents of principal. They are neither independent nor adviser. It was giving a wrong impression to investors. If they wish to continue on commission model, there is nothing wrong in calling themselves as ‘distributor’,” says Suresh Sadagopan of Ladder 7 Financial Advisories.

The move to differentiate the terminology for Investment Advisers and Distributors is not unique to India. In United States, fiduciaries have been clamouring to prevent brokers from using the term ‘adviser’. Read the recommendations put forth by CFA Institute to SEC in this regard.

Experts say that there should be a common rule for different intermediaries in financial services industry to use the title according to the services offered by them. For instance, there is no rule for insurance agents to not call themselves as advisers.

Conversely, some believe that the terminology should not matter. “The rules which govern distributors and advisers should be strong enough which in turn would benefit the end investor. Even SEBI registered RIAs can mis-sell, which is evident by the numerous trading calls we get from Indore- based RIAs. Some of the regulations are designed to rein in such brokers,” says a Mumbai-based distributor.

Some distributors believe that distributors are already well regulated. “Segregation of distribution and RIA is good theoretically. But it is too early to have such stringent regulations in a nascent industry. You can’t say that distributors are biased. Is there any evidence of mis-selling or churning? Even distributors have to handhold investors and offer advice on different aspects of clients’ goals. Clients trust us. AMFI is doing due diligence of distributors, our commissions are in public domain, upfront commissions are banned, and foreign junkets have stopped. How much more regulation do you require? RIAs are compared with doctors. But even doctors get a cut from prescribing certain medicines. Pharma companies indulge doctors with foreign junkets. In comparison, asset management companies have stricter regulations,” says Pune-based distributor Arvind Paranjape.

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