Here's what one can piece together from events of the last week:
It seems likely that the final RIA regulations will come through in Jan 2017, before Mr.Sinha's term ends. There was some speculation earlier that the proposals will be put on a backburner, and will be taken up in due course by the new SEBI Chairman. This is clearly not going to happen. Consultations after reviewing the feedback have been completed, and SEBI seems to have crystalized its final position.
SEBI wants the MF industry to be "aspirational" in its thinking rather than getting bogged down by the comfort of status quo. This change in mindset, SEBI believes, is necessary for the industry to truly harness the vast potential that lies ahead of it. SEBI believes keeping the investor rather than any other stakeholder at the centre of all thinking will enable the industry to make the right choices. Put these 2 statements together and you can safely conclude that SEBI is telling the MF industry to stop demanding a status quo in distribution regulations, and embrace the RIA model which is seen as investor centric, new age and forward looking.
SEBI acknowledges that some relevant points have been made in the feedback received on its consultation paper, which must be addressed in the final regulations. This however does not mean any significant dilution in the key thrust of the new regulations. The core will remain as proposed: a time frame will be given for distributors who wish to migrate to the RIA model to facilitate this move. Only RIAs will be allowed to advice. Distributors as a category will remain, but they cannot offer any form of advice nor can they hold out to investors as offering any form of advice.
The migration time frame currently proposed is 3 years. SEBI has received requests to consider increasing this time frame to 5 years, which will give distributors more time to make such a huge shift successfully and at the same time can ensure that business does not get unduly disrupted in the near and medium term due to an impending change in distribution regulations. It seems to be examining this request seriously.
SEBI seems to be contemplating an MF-RIA intermediation model. These will be MF distributors who do not sell any other products (insurance, bonds etc) and who wish to migrate to the RIA model. The net worth criteria, educational qualifications etc will be diluted for the MF-RIA, to enable existing distributors to migrate successfully. The regular RIA model will permit the advisor to offer advice on all financial products (similar to the current RIA regulations). MF RIAs will however have to restrict their advice only to mutual funds.
The revenue model for MF-RIAs will be similar to current RIA regulations. Trail commission on business done prior to registration as RIA can continue but all fresh business will be only on a fee basis with no commissions whatsoever.
SEBI acknowledges that some thought needs to be given on how to facilitate fee recovery by RIAs without them asking for a quarterly/annual cheque from their clients. Ideas and suggestions around this aspect are being reviewed. We at Wealth Forum had put forward a simple solution to SEBI on this aspect - one which empowers the investor to decide the quantum of fees, but then leaves the quarterly fee recovery to an automated format. We have suggested that a "One Time Mandate" form be devised, wherein an investor can select an existing liquid fund folio of his, select an annual fee that he wishes to pay to his RIA, select the frequency (monthly/quarterly/annual), provide details of the RIA including his registration number, and hand over the signed mandate to an R&T agent, who will, on the basis of the OTM, redeem units at the authorised frequency, for the authorised amount, and pay directly into the RIA's account. We hope SEBI agrees with this suggestion, now that they are open to finding ways of facilitating fee recovery.
Distributors cannot offer any advice: where does this leave their investors?
SEBI seems to be sticking to its position that distributors cannot offer any form of advice and the only way they can do so, is to become either full fledged RIAs or MF-RIAs. If sensible fee recovery mechanisms are indeed introduced, and the time frame is increased from 3 to 5 years as is currently hoped, both steps can ease the transition for those who wish to make the transition. For those who don't wish to make the transition, the big question that SEBI will need to answer is how it expects them to discharge their product suitability responsibilities as set out in the 2012 regulations, if they cannot offer basic or incidental advice. Will SEBI now dilute the product suitability regulations, to ensure that distributors have no need whatsoever to offer basic and incidental advice? And if they do dilute these responsibilities, is that indeed in the investor's best interests?
Welcome to jugaad
Many industry participants believe the RIA regulations are metro centric and are framed largely keeping in mind mass affluent investors, and that they completely ignore ground realities in the retail world and the B-15 space. Now that we know that the RIA regulations in a slightly modified manner are going to become reality, we need to think of the impact on distribution. In the McKinsey round table, this question was asked of all the participants and three options were given for them to vote on: (1) 70% of distributors will fold up and vanish, (2) Distributors will by and large make the transition, reasonably successfully and (3) Distributors will find "work around" solutions to continue serving their clients exactly the way they currently do.
It will perhaps come as no surprise that two-thirds of participants voted the third option as the most likely outcome. We are a land of "jugaad". Demonetization has demonstrated the extent of our jugadoo solutions - across the length and breadth of our country. When I spoke to a leading distributor in late November about impact of demonetization on his clients, he quipped, "In the first 3 days after demonetization, everyone was searching for "solutions". By the 4th day, we had more "solution providers" chasing prospects, than people searching for solutions!"
I got a sneek peek into the kind of jugaad that we might land up seeing in distribution, once the new RIA regulations come in, if indeed they come in a format that ignores ground realities in B-15 towns. I was speaking with a successful distributor who operates in a town of 300,000 people which places this town in the B-100 category. I asked him what he would do, if he is barred from offering any form of incidental or basic advice to his clients and whether that will mean that he will consider moving out of MF distribution. His answer was very simple: "I need to demonstrate that I did not offer any advice. All that it means is I need to take a letter from my client that he has decided on his own about his investments, without any advice from me. That's all. I'll get these letters and we will continue business as usual. Ultimately, to be in business, you must serve your clients well and your clients must see value in your service. Beyond that, whatever paperwork is required, we'll manage that."
If SEBI does not want to promote jugaad, it must think of regulations that will work across the length and breadth of this country - from the biggest metro to the smallest town that has mutual fund investors. I personally maintain that RIA is a welcome move in the development of intermediation in this country, but SEBI has got its emphasis wrong. If the emphasis is more on enhancing sales and advisory processes and ensuring greater compliance, rather than focusing on eliminating commissions and moving to fees, we will genuinely have progressive regulations that indeed serve investors better. It appears however that I am hoping against hope. Welcome to more jugaad!
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