SEBI Working Group Tackles MFD-RIA Overlap

The Securities and Exchange Board of India has appointed a working group to address issues between Mutual Fund Distributors (MFDs) and Registered Investment Advisors (RIAs). The working group will review the current regulatory framework as it relates to the conflicting scope of advice and compliance requirements.

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Potential solutions being considered include having MFDs hold limited licenses to provide investment advice or the potential to be deemed to hold a license if they provide Investment Advisory Services via a mutual fund.

The MFDs have a clear mandate from SEBI to identify conflicts of regulations and related issues. The Working Group consists of industry professionals with experience in providing Investment Advisory Services and, likewise, sales of mutual funds.

As MFDs are attempting to gain advisory rights outside the scope of sales, tensions have risen between the two respective entities.

Core Regulatory Distinctions

MFDs are compensated via commission by the fund houses for the sale and distribution of mutual fund products, primarily mutual fund products. MFDs register themselves with an industry trade association (i.e. AMFI), but they primarily focus their business on the sale and distribution of mutual funds.

RIAs charge client fees for a range of advisory services based on the risk profile of the respective client. RIAs are prohibited from distributing mutual funds due to a conflict of interest. RIAs are able to recommend direct mutual fund products, with no commission being paid. MFDs are not allowed to provide advisory services, although MFDs have significant industry knowledge.

Ground Reality Challenges Silos

Distributors contend that customers prefer practical guidance to actual labelling and that they're better equipped to navigate products and invest money due to years of experience. 
According to investment advisors quoted by Moneycontrol, however, the actions of a distributor cross into the advisory realm. Regulatory environments prioritise labels (a term of art), not the actual outcome for the end investor. 

Many clients do not recognise the distinction between incidental distributor support and formal advice, as these are both found in relationship-driven markets outside of CBDs. 

Segmented fee-sensitivity would likely favour a commission-based model, whereas many investors are reluctant to accept advisory fees. 

Growth Imperatives Drive Reform

Almost 3 lakh mutual fund distributors serve about 60 million unique investors. The number of registered investment advisors is around 1,000, versus the 220 million demat accounts.

To provide a greater range of services for investors, SEBI envisions expanding the existing categories. Working groups are also looking into regulations that would allow distributors to provide advisory services.

Historically, advisors have sold mutual funds (to a certain extent) against their mandate as a regulatory concern. Distributors ask that they receive recognition for the best interest of the customer.

The goal of SEBI is to create a scalable and consistent approach to investor protection and to see continued growth in professional advisors as participation in the markets grows.

The framework for developing these categories to address a competitive disadvantage caused by artificially separating service providers is vital to compliance with the underlying ethics of providing service to clients.

Overall, the advisory panel will systematically review all the areas of overlap in order to provide fair and balanced results. The mutual fund ecosystem can benefit from clearer boundaries and the potential for integrated service delivery.