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SIP books of IFAs are at grave risk

Ashish Modani, SLA Financial Solutions, Jaipur

28th November 2017

The biggest retail success story is at risk

SIPs are the biggest retail success story for the industry, having reached a monthly input value in excess of Rs.5600 crores. All of us are collectively working hard to take this to the magical figure of Rs. 10,000crs per month - or Rs.120,000 crores per annum. Think back - it wasn't so long ago that the entire equity fund AuM of the industry was around Rs. 100,000 crores! We have come a long way indeed. But I fear, unless AMFI corrects a glaring anomaly, the SIP story can be seriously endangered. I want to bring this to the attention of industry leaders, through Wealth Forum, so that a fair and equitable solution can be quickly implemented, in the best interests of investors, distributors and AMCs.

Change of broker guidelines - lumpsums vs SIPs

Sometime back, AMFI came up with guidelines which meant to iron out various issues of our industry on the distribution front. One of these guidelines stated that in case of Change of Broker (COBr) request given by an investor for a particular folio, for existing set of units, no trail shall be paid to new or the old distributor. This was done to prevent malpractices of distributors poaching each other's clients, sometimes by offering incentives to investors to induce switching brokers. The way the rule now stands is that if a distributor gets an investor to switch his broker code on existing investments, neither of the brokers earns any commissions on those units. The new broker earns only when fresh investments are made by the investor using the new broker's code. If a distributor wants to earn commissions on AuM transferred into his code, he will have to ask the investor to sell, incur capital gains implications and then reinvest under the new broker's code - quite a tall ask, considering the anti-investor nature of activities that the new broker will have to suggest in order to earn from switched AuM. The spirit of the policy and its implementation have by and large had the desired effect of curbing rampant "AuM purchase".

Now however, consider the scenario in SIPs - the industry's biggest growth engine. Investor A starts a 10 year SIP of Rs. 10,000 per month for his retirement on the advice of distributor X - a hardworking, sincere IFA, and has so far invested 11 monthly instalments of his 10 year SIP. Y is a big well-funded stock broking firm that is now spreading its tentacles in fund distribution. Y decides to adopt the easy route to ramp up MF business - just buy out SIPs of IFA clients!So, it starts approaching investors of IFAs like X - like Mr.A - and offers a cash incentive to simply sign a CoBr letter. Investor A signs the letter. Now, Y becomes the broker for that SIP, and for no effort at all, will enjoy trail commission on the balance instalments of 9 years and 1 month! What a wonderful way to build a SIP book! IFA X does all the hard work of getting the client into a goal based 10 year SIP and big broker Y uses unethical money power to simply buy out the SIP.

Legalistic answers won't do - think of business implications

When we speak with AMCs about this situation, we get legalistic answers, which do not recognize ground realities. We get operations oriented answers, not business focused answers. We are told that since every new SIP instalment is "technically" a new purchase transaction, the new broker will be entitled to commissions on the balance instalments of the SIP that was sourced by the old broker. We are given explanations on how the letter of the guidelines on CoBr are being scrupulously adhered to.

Let us assume for a moment that the letter of the guideline is indeed being adhered to - in the sense that only new purchase transactions in the same folio - whether lumpsum or SIP instalments - are eligible for commission payment to the new broker. My question to all AMC CEOs is very simple: is this really the spirit of what was sought to be achieved? Was AMFI's thinking that we should deter only lumpsum AuM purchase but must actively encourage SIP purchase by brokers?

If this anomaly is not corrected soon, we are going to see rampant abuse in the market by well-funded financial services conglomerates unethically inducing IFA clients and purchasing off large blocks of SIP books that have been painstakingly built up over the years. Most serious IFAs gave up upfront commissions in favour of higher trail commissions, in order to build annuity income streams. Most IFAs have consciously adopted goal based SIP selling, which has increased longevity of SIPs as well as SIP amounts. All of this will now work against IFAs as long-term SIPs with healthy trail commissions are now an open invitation to unscrupulous well-funded brokers.

Simple solution to avoid rampant abuse

A simple solution is to disable any commissions to either party for the entire period of the SIP in case of an investor initiated change of broker. Let the new broker try to convince the client that it is in his best interests to stop the SIP and start a new one. Let investors ask why. Let the facts be known to the investor and then let the investor make an informed choice.

IFAs have been at the forefront of the big SIP revolution in this country. AMFI needs to decide quickly whether it wants to do the right thing and protect the interests of IFAs or turn a blind eye and put IFA SIP books at grave risk. My humble request to AMC CEOs is to please act on this matter quickly, and to the right thing which is consistent with the letter and the spirit of the AMFI guideline on change of brokers.

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