SEBI has come out with a circular specifying the disclosure format for Consolidated Account Statement to be issued to investors by AMCs on a half-yearly basis.
You can go through the SEBI Circular here. SEBI has also provided sample format for Consolidated Account Statement (CAS).
This CAS will clearly show how much your distributor is making through your MF investments.
To the uninitiated, every MF scheme has two plans: Direct and Regular.
Under Regular plan, you invest through an intermediary (local distributor, online portals such as ICICIDirect, FundsIndia). AMC compensates the intermediaries through commissions.
Under Direct plan, you bypass the distributor and invest directly with the fund house or through portal such as MFUtility and Invezta. In direct plans, there is no intermediary commission paid by the fund house and that adds to your returns.
SEBI Consolidated Account Statement Format
- Such statements will be sent by AMCs on half-yearly basis. You will get statements for the periods April 1- September 30 and October 1-March 31. You will get from each AMC you have invested with.
- AMC has to provide expense ratio of the scheme you have invested. AMC can provide for both direct and regular plans or only the plan you have invested in.
- In the last scheme, AMC will provide the gross commission paid to the distributor in the relevant 6-month period. Commission does not only include monetary payments but also other benefits in form of gifts/rewards, trips, sponsorship events etc. Gross commissions will also include service tax borne by the distributor.
Disclosure of gross commission paid to the distributor is the major bone of contention to the distributor community.
Points to Note
- How many of us care to read the account statements sent by AMCs? Most of us are only interested in “how much I have invested?” and “what is the value of my investment?”
- AMCs hardly ever send Consolidated Account Statements by courier/e-mail. In my experience, I have received statements on a regular basis only from HDFC AMC. Though the AMCs are mandated to send Account statements on a regular basis, who cares about regulations?
I get statement only after a transaction is executed. Those statements need not be in the prescribed format.
What do I think about this move?
SEBI has been pushing investors to invest in direct plans. The markets regulator clearly wants all distributors to work under no-commission model, become SEBI Registered Investment Advisers (RIA) and charge only a fee. This will eliminate any potential conflict of interest. The intent is quite good.
From information point of view too, this is a good move. You must know how much you are paying as commissions. For a big portfolio, the commission can be quite high. If you have an equity fund portfolio of Rs 1 crore with a distributor and average trail commission is 0.75%, you are implicitly paying almost Rs 75,000 to the distributor. You need to see if the service provided is worth it.
Distributors add value to investor portfolios in many ways. They help investors in selecting good MF schemes suited to meet your financial goals, review and rebalance your portfolios, simplify operational procedures for you and guide you through turbulent times.
You must see if the implicit commission is worth it, especially for large portfolios.
If you feel the cost is too high, you can request your distributors to shift to a fee-only model where you pay a flat fee. The quantum of flat fee could be mutually arrived at. So, you can pay a fee and subsequently invest in direct plans of MF schemes.
There are online distributors such as ICICIDirect which do not add any value (have not added any value to my portfolio for the 10 years I have invested through them) to your portfolio. There are many other portals like ICICIDirect that offer only the ease of investment. Nothing else.
If you are investing through such portals, your Consolidated Account Statement might open your eyes.
As I have always maintained, Do-it-yourself (DIY) investors must invest only in Direct plans.
Distributor community is unhappy
Distributor community is clearly outraged at these disclosure norms. I will list down some of their common worries.
1. Many distributors fear is that this might result in pass back.
We are good hagglers. We do not miss out on an opportunity to haggle. Till such time commissions were hidden, investors wouldn’t care much. Once the commissions are out in the open, a game of negotiation, albeit illegal, might start. Investors might insist on pass backs. Many of us who have purchased LIC plans will be quite aware of pass backs. By the way, pass back in insurance plans is illegal too.
This is more likely to happen when your schemes (or the markets in general) have not done well. Investors may not be happy to see the distributor making money while they are incurring losses. This can cause friction and mistrust among distributor and the client.
2. SEBI is relatively an active regulator. IRDA is a poor regulator, probably one of the worst we have in India. In my opinion, IRDA is of the agents, for the agents and by the insurance agents. Where other regulators are trying to reduce intermediary commissions, IRDA floated an exposure draft suggesting increase in commissions.
The commission disclosure in mutual funds may give an opportunity to insurance agents to push poor insurance products to customers. There is no disclosure of insurance commissions.
In my opinion, some of these apprehensions might be true but the distributor community needs to demonstrate the value to their clients and figure out a way. I am sure all good distributors will.
Fortunately or unfortunately, they do not have comfort of a poor regulator such as IRDA.
I am a SEBI Registered Investment Adviser (fee-only investment adviser) and with these disclosure norms, I might (not necessarily) benefit at the expense of distributors. Hence, you are advised to view my comments on disclosure norms in this light.