Come 1st October 2016 and you will witness 2 big changes – Mutual Funds Commission Disclosure and E-Insurance. These two changes will change the way these two industries work. First, it is mutual funds where the commission of distributors will get disclosed to their clients.This is a big step and will disrupt the mutual fund’s industry. The second bigger change is happening in insurance where from 1st October 2016 it’s going to be completely digital. Put simply, e-insurance is being made mandatory.
Let me take you through these 2 changes and why I see them a bigger change:
Commissions have been the reason behind huge mis-selling. Be it insurance or mutual funds commissions have made intermediaries put their interest over their client interest just to earn higher commissions. In the past, the presence of entry load in mutual funds made churning a frequent phenomenon which hurt investors badly but benefited intermediaries. Realizing it regulator waived of entry load in 2009 and since then the interest in churning clients portfolio has come down. The Investment Adviser Regulations in 2013 was a bigger step which will change the dynamics of financial advisory services completely. No more an advisor can advise holistically if unregistered.
But the bigger change is coming in October 2016. Till now investors hardly knew what their mutual fund advisor is earning. The mismatch between the service of an advisor and the income he/she earns was highly prevalent. This is going to change. From 1st October 2016 in the bi-annual statement of mutual funds, investors will be able to see what their advisor has earned from their investments i.e. what money advisor is making from the services he/she is delivering. This biannual statement will carry other details too like expense ratios of direct and regular plans etc..
Surely advisors whose earnings rely solely on commissions are not convinced with this new norm as it will open a plethora of questions from the investors. But to my view, it’s a welcome step as it will bring mutual fund industry to the advisory framework. Once implemented the advisors will have to look at improving their services based on what they are earning from their clients. Advisors who are not able to do so may end up facing the dissatisfaction of their investors. Also, no more product push will work from here on. The days of selling a mutual fund without an advice will slowly die down and advisors will have to raise their standards to bring advisory in their practice. This will force many to go for Sebi Registration which again will bring many advisors within the advisory regulations. Many advisors have also not taken the direct plan seriously and have been reluctant to inform their customers. But this new norm will bring information about direct plans to the investor table. The discussion around why and why not will start with the advisor and at the end, it will be the investor who will benefit. Overall this new norm from 1st October 2016 will benefit investors by moving the mutual fund industry from product sale to advisory setup.
Digital India is the way to go. Mutual Funds have been making it in a big way. But this time, insurance is heading towards it. With IRDA new norm, from 1st October 2016, all life insurance policies above a threshold premium and sum assured and all health, motor, travel and other insurances will be mandatorily held in electronic form. The new policies post this date and renewal of older policies will be done only electronically. This will be achieved through the e-insurance account which can be opened with insurance repositories Cams, Karvy, NSDL and CDSL. Once the e-insurance account is opened you will have to apply for conversion of previous policies from physical to e-insurance while all new policies will be issued only in e-insurance account.
Why The Change Is Good?
E-Insurance can surely be seen as a changing landscape in Indian Insurance Industry. With digitization, we can look forward to efficient record keeping although efficient products is surely the need of the hour.
But it’s the mutual fund commission disclosure which will disrupt the industry. Not many intermediaries selling mutual funds are convinced and see it as a threat to their business. Till now the discussion on what they earn and what they deliver has not been there. But from 1st October 2016 one can foresee its happening. For investors, it is a win-win situation as mutual funds industry will move to an advisory framework which in turn will start offering them unbiased advice.