Most of us deal with a single person when it comes to our investments. He/she normally informs us about company fixed deposits and bonds. When we want to invest in mutual funds, we go by what the person recommends. The same applies to insurance policies as well. All we have to do is sign on the forms and write the cheque, and the rest is taken care of by the ‘advisor’.
However, all this is set to change. The Securities and Exchange Board of India (Sebi) recently put out a draft proposal to segregate the role of an agent and an advisor, as there have have been numerous complaints about misselling of products by the so-called advisors.
This happens mainly because the person we call our investment advisor is typically an agent or a distributor of mutual funds or insurance products or both. Since such ‘agent-advisors’ don’t mostly get any fee for advice, they have to earn their living from the companies whose products they sell. Naturally, this could bias their recommendations.
“As per the (Sebi) proposal, the role of an agent and advisor will be segregated. An investor will have to work with two people – an advisor and an agent. The investor will get unbiased advice but the onus of transaction will shift to the investor,” says Vishal Dhawan, founder, Plan Ahead Wealth Advisors.
According to the Sebi concept paper, dealing with a single entity creates a conflict of interest. This is because the distributor ends up playing a dual role. He/she may receive commission from the manufacturer (mutual fund house is a manufacturer) as well as advisory fees or other charges from the investor. So the question that arises is, “Whose interest does the distributor represent: the manufacturers’ or the investors’?”
As per the Sebi paper, the prevalence of divided loyalties may not be in the best interest of investors. The paper suggests that the person who interfaces with the customer must declare upfront if he/she is a financial advisor or an agent of the manufacturer. If the person is an advisor, he/she will receive all payments or fees from the investor and there would be no limits set on these payments. If he/she is an agent associated with a manufacturer, the person would receive remuneration from the manufacturer only. This, according to the paper, could resolve the conflict of interest.