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Why Commission Driven Model In Mutual Funds Should Be Eliminated... - Outside View by PersonalFN

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Why Commission Driven Model In Mutual Funds Should Be Eliminated...
Feb 15, 2017

Seldom does India's capital market regulator bend before industry resistance. But recently the Securities and Exchange Board of India (SEBI) moderated its stance on the 'fee-based' model mutual fund houses use. This is a very crucial development considering SEBI's intent of segregating 'advisors' from 'distributors'.

Retracting from its earlier position, making the mutual fund industry migrate from the current 'commission-driven model' to the 'fee-based' model, the capital market regulator seems to have made its mind up to allow the co-existence of both models.

SEBI has bought more time to study the implications of such a high-impact transition thoroughly.

Taking a serious note of the rampant mis-selling of mutual fund schemes, SEBI pondered on discontinuing the commission-oriented model. This effort had received a special impetus from the Sumit Bose Committee recommendations.

The Finance Ministry had appointed a Committee under the chairmanship of Mr Sumit Bose to curb the mis-selling of financial products and rationalise the distribution of incentives. The committee report highlighted the self-serving approach adopted by a majority of agents and distributors of financial products. According to the report, the mis-selling was prevalent at all stages of the product cycle-at the point of sale, post-sales, and/or even at both stages. The most affected segments that receive recurring complaints are insurance, mutual funds, and pensions plans.

SEBI took many corrective steps to make mutual fund houses more accountable. It also tightened the disclosure norms. It ticked-off mutual fund houses for not promoting direct plans adequately. SEBI didn't stop there-prohibiting the mutual fund distributors from offering incidental advice was the next step in its mission to protect investors' interest. If this were to take effect, about 50,000 mutual fund distributors would be out of business.

So far, the industry has shown solidarity in opposing SEBI's strict measures. On most of the occasions, SEBI remained nonchalant. When asked about the industry protest, SEBI chief, Mr U.K. Sinha once responded to a press query saying, "Obviously, a section of advisors are very unhappy with it ( the new norms) but that is a challenge that SEBI as a regulator has to face all the time. We're doing this (taking tough decisions) because these are recommendations of the report by the Sumit Bose Committee (which was formed under the Ministry of Finance)."

However, this time, SEBI has taken a step back-apparently in the admission of it going overboard with the regulation. SEBI's International Advisory Board (IAB) has advised that 'fee-based' model should be envisaged as a substitute for the current commission driven model only after a careful examination.

PersonalFN is of the view that, SEBI's caution to revisit its previous stance is justifiable and even sensible; because mutual fund investments are still unpopular with a majority of Indians. But, what's incomprehensible is SEBI's soft position on mutual fund houses launching New Fund Offers (NFOs) with little thought. This has been the root cause of mis-selling. Often, distributors get hooked on to the high commissions offered by the mutual fund houses to promote NFOs that make little sense. Despite SEBI's repeated appeals to merge similar schemes, mutual fund houses have shown apathy.

If the commission-based model is eliminated completely, the industry may find it impossible to grow. Therefore, SEBI is likely to take its time to introduce changes. However, what stops it from nudging mutual fund houses to correct their myopic vision?

How many schemes does a fund house offer is a good test to judge its intent. Nonetheless, this is not to say that, those with fewer schemes are better. Do your research thoroughly before investing. In case you find it difficult to choose a right mutual fund for your portfolio, you may like to try out unbiased mutual fund services offered by PersonalFN.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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