What you can and can’t do as a mutual fund distributor

Aakash Bansal, co-founder and ceo of Mercury Financial, on what services mutual fund distributors can offer in light of new RIA norms.
By Guest |  25-08-20 | 
 
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Morningstar invites thought leaders from the investment community to share their insights. Views expressed are personal and should not be construed as investment advice.

In my previous post, I took a deep dive into the Registered Investment Adviser Regulations. In this article, we shall look at the services which mutual fund distributors can offer.

Let us look at the guidelines and code of conduct which all MFDs must adhere to.

Here are some definitions from AMFI/SEBI uniform guidelines for MFD:

Intermediary: All persons or entities involved in selling and distribution of mutual fund products.

Declaration of Self Certification (DSC):  AMCs (or registrars on behalf of fund houses) would obtain DSC annually from empaneled mutual fund distributor as to their having complied with guidelines & code of conduct.

Click here to look at the code of conduct that defines what an MFD should do or what the regulator expects them to do.

One important observation

“A focus on financial planning and advisory services ensures correct selling and also reduces the trend towards investors asking for pass back of commissions” was point no 15 in SEBI code of conduct dated  August 27, 2009 which also gets mentioned in DSC but the latest and revised code of conduct for MFDs on AMFI website does not have this point. Making it very clear that MFDs cannot do financial planning or provide advisory services.

Amendment in the RIA regulations has not just affected existing RIAs but also MFDs. The most important change that has been done for MFDs in the latest amendment is:

Usage of nomenclature

No person dealing in the distribution of securities (MFDs) applicable for both individuals and non-individuals, shall use the nomenclature “Independent Financial Adviser (IFA) or Wealth Adviser or any other similar name,” unless registered with SEBI as Investment Adviser.

Disclosures by MFDs

Distributors can explain the features of products to clients and shall ensure the principle of ‘appropriateness’ of products to clients. As per the extant SEBI circulars, appropriateness is defined as selling only that product categorization that is identified as best suited for the client.

Incidental activity

Happening by chance or as a minor accompaniment to core activity.

My view: All circulars, guidelines and code of conduct define a mutual fund distributor or intermediary as person or agent selling, marketing, advertising mutual fund schemes on behalf of AMCs. MFDs can only sell and distribute mutual fund schemes and in this process,  they have to ensure “appropriateness” of sold products is checked while distributing to clients like explaining product specification, disclosing product features and risk associated with those products. MFD has to keep clients interest protected and abstain from any mis-selling activities for any extra commission or any other reason. All commissions to be disclosed and no pass back to be given as an incentive for buying any schemes.

MFDs cannot do financial or goal planning, cannot provide advice for investment in securities or investment products, cannot call them with nomenclature like ‘adviser’ or with any other similar name as mentioned in the amendment.

Understanding the clarity that is now provided by this new circular and the direction that the regulator wants the future of intermediation to be in, I have come to a conclusion that we as intermediaries have to choose a business model after doing some self-introspection. These are:

  • What is the vision of the practice that I run?
  • Where do I see my practice in the next 5, 10, 15, 20 years’ time horizon?
  • What are my strengths and weaknesses?
  • How should I engage my customers?
  • What is going to be my value proposition with clients both existing and potential?
  • What is my growth strategy

And you may have more questions. When you answer these, I’m sure you will have the clarity in the direction that you or your practice should take. There are finite possibilities that you would conclude with.

Continue as MFD

  • Change in nomenclature
  • Stop providing advice
  • Depend on commissions as revenue model
  • Position oneself as a mutual fund distributor

Transition to RIA: It is a difficult choice and comes with challenges of embracing change. However, there are a lot of considerations that have to be overcome.

Continue as RIA: Prepare your business for adherence to proposed additional requirements to continue as an RIA, review your business processes and adopt technology to help scale and focus on client management.

Technology platforms for MFD, specialized technology platforms for RIAs and IFA infrastructure company can help them comply with all the regulations. Lastly, these platforms allow intermediaries to retain their identity and clients.

William Shakespeare once said “No legacy is so rich as Honesty” as “Honest has nothing to Hide”

Build your practice which will last for decades not just for years.

ALSO READ: Demystifying investment adviser regulation.

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