Adviser vs distributor: Why the standards used for mutual funds do not apply to insurers, banks?

A mutual fund distributor (MFD) cannot call himself /herself an adviser, unless s/he is registered with Sebi as a registered investment adviser (RIA). An MFD cannot charge advisory fees from clients, instead he is remunerated by the mutual fund by way of commissions and cannot advice clients. S/he can give only ‘incidental advice’ as s/he is not as equipped as an RIA. Fair enough.

The Sebi move is for more evolved advice, which should benefit investors. Now let’s look at the broader picture. There is need for uniformity across the country, across financial products.

Let us say, a lay investor walks into a leading bank for some banking transaction, and is approached by a bank employee with sales targets for third party products. It does not matter whether the bank has an advisory licence or distributor licence, or both, with client-level segregation. The client has trust and faith in the bank, by virtue of it being a leading lender, and the official is supposed to sell suitable products, not commercially-oriented ones.

There are instances of mutual fund products being sold in banks as ‘similar to bank FDs’, insurance products sold as ‘similar to FDs’, additional Tier-1 perpetual bonds (AT1 Perps) being sold as ‘similar to FD’.

When the AT1 Perps of YES Bank were written down, this issue came to the fore that these were sold as ‘similar to FDs’ of the bank. From a broader perspective, investor protection is more important than nomenclature of the intermediary.

There may be a turf issue here, as RBI regulates banks, while mutual fund products are regulated by Sebi and insurance products by IRDAI. However, if so much care is being taken about whether one can or cannot call himself/herself an adviser in the context of mutual fund products, minimum care should be taken to ensure basic hygiene in selling financial products to gullible bank savers.

If the bank is confident of the quality of the advice, let it give the advice, charge fees for it (akin to the RIA method) and let the customer go elsewhere for execution. In the insurance industry, the number of agents is approximately 10 times more than the number of MFDs in the mutual fund industry. Insurance agents can describe themselves by any description, including as insurance adviser. Though there is a basic eligibility test to be cleared for an intermediary to sell insurance, in terms of rigour, it is comparable to the MFD eligibility test rather than the more rigorous RIA eligibility.

The insurance adviser is remunerated by the insurance company in the form of commissions (like how MFDs survive on commission from fund houses). The insurance adviser does not charge fees to the client i.e. does not work on the RIA model. If it is required in the interest of investor protection that an intermediary, who is remunerated by the product manufacturer (e.g. MF), which may drive him/her on commercial considerations than product suitability, they too should call themselves distributors rather than advisers – the same norm should be applicable across financial products.

To draw some more parallel, an intermediary selling a corporate fixed deposit or a chit fund, who may or may not have the eligibility of a MFD, can call himself /herself an adviser. Use of the term i.e. adviser v/s distributor, has been selective so far, applicable only to mutual fund distributors.

Investor protection is paramount, above granular details of how much an RIA can charge his/her client or how much commission a MF can pay to a mutual fund distributor. In other industries, commercial considerations are left at that, not decided by the regulator. For example, in the pharma industry, the regulator does not care much about how much commission would be paid by the medicine manufacturer to the pharmacy, where from you and I buy medicines from. While overall medicine prices are regulated (in case of DPCO-controlled medicines), the margins to be retained by the manufacturer and the payout to the distributor are flexible, subject to some limits that are much higher than that on offer in the MF industry.

If the financial services industry is different and everything needs to be regulated, then it should be uniform across products. The Ministry of Finance constituted a committee to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products, popularly known as the Sumit Bose Committee. This committee submitted its report in August, 2015. That report, just one Google search away, deals with mis-selling, commissions, regulatory arbitrage i.e. regulators working in their sectoral silos, and of course offers recommendations.

The point is, while the MF industry is tightly regulated, other sectors need to catch up, for the sake of the ultimate beneficiary – the investor.