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Mumbai, Markets regulator Sebi is building an artificial intelligence tool to help detect misselling by mutual funds, its <keyword id="15070191" type="General" weightage="50" keywordseo="chairperson-madhabi-puri-buch" source="Orion">Chairperson Madhabi Puri Buch</keyword> said on Tuesday. She cited a recent incident of a 90-year-old being sold a product with a seven-year lock-in period to illustrate an instance of misselling, and said algorithms will help flag such cases. "We are working on the question of misselling that may happen by a mutual fund distributor or an agent or by someone who is the responsibility of the mutual fund," Buch said while speaking at the fourth <keyword id="9621521" type="General" weightage="20" keywordseo="global-fintech-fest" source="Orion">Global Fintech Fest</keyword> here. She admitted that this is a very complex problem requiring intelligence, and added that the algorithm being built will have the essential tools to detect misselling like flagging the case of a 90-year-old being sold the product with a long lock-in period. At present, mutual funds submit essential data to Sebi periodically with respect to compliance with regulations. A "nil report" is considered the best, Buch said. At the same time, Buch said there may be misselling that may go unnoticed in the rule-based supervision and those same will be detected with the AI tool. "As we move to using AI to analyse the data, we hope that we will also find the ability to monitor these things (misselling) in the interest of the investors," she said. Meanwhile, Buch said the regulator is also keen to introduce fractional ownership of shares but the current legal set up does not allow it. "Somebody came with that (idea) and we thought it was good... we would have wanted to welcome them into the innovation sandbox but it is not permitted in the <keyword id="4625796" type="General" weightage="20" keywordseo="sebi-act" source="Orion">Sebi Act</keyword> itself. "It cannot be done until we change the Act -- not just the Sebi Act, but also the Companies Act," she said.

Sebi working on AI tool to curb misselling by mutual funds: Buch

<keyword id="443223" type="UNKNOWN" weightage="100" keywordseo="misselling">Misselling</keyword> is defined as deliberate, reckless, or negligent sale of products or services in circumstances where the contract is either misrepresented, or the product or service is unsuitable for the customer's needs. 
 
In simple terms Misselling means that you were given unsuitable advice, the risks were not explained to you or you were not given the information you needed, and ended up with a product that isn’t right for you. 
 
Examples of Misselling in Finance 
· Selling life insurance to someone who has no dependents. 
· Selling retired or elderly person a long-term or child plan. 
· Selling the policy promising a single premium mode or a limited term policy but it actually turns out to be a regular premium mode. 
· Selling endowment plans without disclosing the expenses and commissions earned, 
· Selling ULIPs by promising huge returns, 
· Asking investors to surrender the existing policy (giving false reasons of non performance) and to buy a new high commission-yielding policy. Churning the policy every five or six years while the policyholder pays the price 
· Selling investor five funds with SIPs of Rs 1,000 each instead of one fund with SIP of Rs 5,000. 
· A bank relationship manager suggesting his client to exit from the existing funds as their NAV is at Rs 140, Rs 80 each, and instead start fresh SIP investments in two cheap NFOs with their NAV of Rs 10 each, recommended by the bank’s research team. Relationship manager used the ignorance of his client that low NAV doesn’t mean the fund is cheap and it has nothing to do with the future performance of the fund. · Recently it’s also observed that some unscrupulous elements call randomly(send emails) and introduce themselves as belonging from <keyword id="6361421" type="ORGANIZATION" weightage="60" keywordseo="IRDA">IRDA</keyword> or Ministry of Finance or <keyword id="30067" type="ORGANIZATION" weightage="60" keywordseo="RBI">RBI</keyword> and lure customers with fake offers like bonus or incentives. But they are pushing high commission-yielding products. 
 
Misselling for financial products is not unique to insurance and happens in various lines of businesses such as loans, credit cards, investment products, pharmacy, hospitality etc. The customers mostly buy financial products either in obligation or because of ignorance. Lot of mis-selling of insurance policy happens during last month of a financial year as people are in a hurry to save taxes. 
 
But Misselling is quite rampant in our daily life also in products other than the financial products. Example of a misselling of non financial products: 
 
● Say you were looking to use 4G on a mobile phone. You told the shop assistant that you planned use 4G and they recommended a model. Then you took it home, and found that it doesn’t work. There’s nothing wrong with the phone itself – it’s not faulty – but it’s not what you needed. The mobile phone was mis-sold to you. 
● Fairness creams are a multi-billion rupee industry in India as in India a large population equates fairness with beauty and superiority. Now they have for men too! 
● A superior course, global exposure, international faculty, good placement. Many universities claim. 
● Speak Asia, duped around 23 lakh investors to the tune of Rs 2,000 crore. It promised a weekly income, merely on filling online survey forms. Members paid money to join the firm’s network and earn reward points for referring its offerings to friends and peers. 
● Diet soda With no calories or sugar, comes with its own set of side effects that may harm your health-from kick starting kidney problems to adding inches to your waistline. 
● Brown bread much of the ‘brown’ bread you’ll find in the supermarket is simply the same white bread with brown coloring added. Hardly the healthier choice it’s made out to be! 
● As Indians are becoming more health conscious market is full of high nutritional products heart-healthy cooking oil, crunchy granola bars, fruit-flavoured yoghurt, to dry fruit-sprinkled muesli, we are taking everything that screams low calorie. 
 
If something looks too good to be true, it probably is. And this applies in case of buying anything, any product financial products as well. Don’t get tricked into the trap of marketing, intermediaries and buy the product just because the advertisement or agent is eulogizing it. 
 
Ignorance is no bliss. If you have limited wisdom about a product, an insurance plan or a mutual fund scheme, it becomes easy for commission-seeking agents to trick you into the wrong insurance or mutual fund scheme. Understand that a salesperson or an agent’s job is not to advice on the product's suitability for the specific needs of customers. He/she is just an intermediary between the company he is representing and you, as a customer and so his strategy revolves around just three words: sell, sell, sell. It is unrewarding for him to think about the investor’s financial goals when he has his own to fulfill. 
 
Stop the blame game. Do your own homework before buying any product, including financial product. Playing victim is no use and then till how long can you hide behind it. Misselling happens because mis-buying happens. There is no easy way out, no short cuts. As they say “It is easier to protect your feet with slippers than to cover the earth with carpet.” 
This article is written by Kritika. 
Image: Thinkstock

Misselling: Why You Need To Beware Of It

To bring transparency in expenses and curb mis-selling, markets regulator SEBI has asked alternative investment funds (<keyword id="1006423" type="General" weightage="100" keywordseo="aifs" source="Orion">AIFs</keyword>) to provide an option of "direct plan" for investors and introduced a trail model for distribution commission. In addition, the regulator came out with guidelines with respect to excluding an investor from an investment in <keyword id="161906" type="General" weightage="80" keywordseo="aif" source="Orion">AIF</keyword>. This came after the regulator observed inconsistency and lack of adequate disclosure in Private <keyword id="17098646" type="General" weightage="50" keywordseo="placement-memorandum" source="Orion">Placement Memorandum</keyword> (PPM) with respect to certain industry practices. The new rules are aimed at providing flexibility to investors for investing in AIFs, bringing transparency in expenses and curbing mis-selling, the <keyword id="6355630" type="General" weightage="50" keywordseo="securities-and-exchange-board-of-india" source="Orion">Securities and Exchange Board of India</keyword> (SEBI) said in two separate circulars. The framework pertaining to the direct plan will come into force from May 1, while those related to excluding an investor from an AIF investment will become effective immediately. Directing AIFs, SEBI said,"schemes of AIFs shall have an option of 'Direct Plan' for investors" and through such direct plans, investors will have the opportunity to participate in an AIF without having to pay any distribution fee or placement fee. AIFs will have to ensure that investors who approach the AIF through a registered intermediary, which is separately charging the investor any fee such as an advisory fee or portfolio management fee, are on-boarded through a direct plan only. Introducing a trail model for distribution commission, SEBI said that category III AIFs would charge distribution fee from investors only on an equal trail basis. It means no upfront distribution fee would be charged by such AIFs directly or indirectly from their investors. Further, any distribution charge paid would be only from the management fee received by the managers of such category III AIFs. For other two categories, AIFs may pay up to one-third of the total distribution fee to the distributors on upfront basis, and the remaining distribution fee would be paid to the distributors on equal trail basis over the tenure of the fund. Also, SEBI asked AIFs to disclose distribution fees to the investors at the time of on-boarding. The capital markets regulator has already barred upfront commissions for portfolio management services and mutual funds. Upfront commission is a one-time payment made by a fund to a distributor on selling a scheme to an investor. Trail commission, on the other hand, is a recurring fee paid to a distributor until the investment is withdrawn. With regard to excusing or excluding an investor, SEBI said that an AIF may excuse its investor from participating in a particular investment in certain circumstances. Those circumstances include if an investor, based on the opinion of a legal professional, confirms that its participation in the investment opportunity would be in violation of rule; or if the investor, as part of an agreement signed with the AIF, had disclosed to the manager that its participation in such investment opportunity would be in contravention to the internal policy of the investor. Further, the manager will have to ensure that terms of such agreement with the investor include reporting of any change in the disclosed internal policy, to the AIF, within 15 days of such change. Moreover, an AIF may exclude an investor from participating in a particular investment opportunity, if the manager of the AIF is satisfied that the participation of such investor in the investment opportunity would lead to the scheme of the AIF being in violation of rule or would result in material adverse effect on the scheme of the AIF. If the investor of an AIF is also an AIF or any other investment vehicle, such investor may be partially excluded from participation in an investment opportunity, to the extent of the contribution of the investment vehicle's underlying investors who are to be excused from such investment opportunity. The manager will have to record the rationale for such exclusions along with the supporting documents. In February 2020, the regulator introduced a template for PPM for AIFs, in order to ascertain that a certain minimum level of information in a simple and comparable format is disclosed to investors. The PPM template provides for disclosure with respect to direct plan for investors, and constituents of fees that may be charged by the AIF, including distribution fee. SEE ALSO: <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/science/space/news/a-giant-asteroid-the-size-of-qutub-minar-to-pass-dangerously-close-to-earth-at-30-times-the-speed-of-sound/articleshow/99406843.cms">Just Look Up: Giant asteroid the size of Qutub Minar to pass dangerously close to Earth</a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/finance/news/nse-indices-launches-indias-first-ever-reits-and-invits-index/articleshow/99407069.cms">NSE Indices launches India's first-ever REITs and InvITs index</a>

SEBI asks AIFs to provide "direct plan" option to investors; introduces trail model for distribution commission

New Delhi, Jan 22 () Markets regulator Sebi has notified norms governing portfolio managers, under which the minimum investment limit for investors has been doubled to Rs 50 lakh, and the managers have been directed to increase their net worth to Rs 5 crore within three years.
 The move is part of Sebi's efforts to keep retail investors away from portfolio management schemes as well as to curb mis-selling and weed out non-serious players.
 Portfolio Management Schemes (PMS) offer investors a range of specialised investment strategies to capitalise on opportunities in the market and make suitable to the needs of individual clients.
 In a notification, the regulator said it has amended Sebi (Portfolio Managers) Regulations, to enhance the eligibility criteria and define the role of principal officer clearly.
 Under the new norms, a portfolio manager needs to mandatorily employ minimum one person with defined eligibility criteria in addition to principal and compliance officer.
 "The portfolio manager shall not accept from the client, funds or securities worth less than Rs 50 lakh," Sebi said adding existing investments of clients may continue as such till end date of PMS agreement or as specified by it.
 Earlier, the minimum investment amount for investors in portfolio management schemes was Rs 25 lakh.
 Further, the regulator has increased the networth requirement of portfolio managers to Rs 5 crore from Rs 2 crore and asked the existing portfolio managers to meet the enhanced requirement within 36 months.
 The regulator further said discretionary portfolio managers will invest only in listed securities, money market instruments and mutual funds, on the other hand non discretionary managers can invest or provide advice for investment up to 25 per cent of the assets under management of such clients in unlisted securities.
 "The portfolio manager shall not while dealing with clients' funds indulge in speculative transactions i.e, it shall not enter into any transaction for purchase or sale of any security which is periodically or ultimately settled otherwise than by actual delivery or transfer of security except the transactions in derivatives," Sebi said in a notification dated January 16.
 It further said such manager will not deploy "the clients' funds in bill discounting, badla financing or for the purpose of lending or placement with corporate or non-corporate bodies...shall not invest the clients' funds in the portfolio managed or administered by another portfolio manager".
 Sebi said portfolio manager while investing in units of mutual funds through direct plan will not charge any kind of distribution related fees to the client. Further, they have been barred from leveraging the portfolio of its clients for investment in derivatives.
 The appointment of custodian will be mandatory for all portfolio managers, except for those providing only advisory service. SP SP ANU
ANU

Sebi notifies portfolio managers norms; doubles investment limit to Rs 50 lakh

FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.
<a href="http://vanguardadvisorsblog.com/2014/02/17/what-makes-a-stock-pickers-market/">Three Reasons Lower Stock Correlations Don't Necessarily Make A Stock Pickers Market </a>(Vanguard) 
Some argue that lower stock correlations - when make a better environment for active managers. But Jim Rowley, a senior investment analyst in Vanguard Investment Strategy Group, doesn't think this is necessarily the case for three key reasons. 1. "Correlation shows directional movement of stocks, not the magnitude of movement." 2. "No matter the correlation environment, it's still a zero-sum game." 3. "Active management has the potential to add value in up or down markets." 
<a href="http://www.morningstar.com/cover/videocenter.aspx?id=635504">What Investors Should Consider Before Taking On Strategy ETFs</a> (Morningstar) 
In the past year we've seen a rise in Strategy ETFs. These differ from others by offering "an alternative exposure that tries to beat the market or offer some kind of enhanced exposure," according to Sam Lee, a strategist and also the editor of Morningstar ETFInvestor. So how do you know if these are right for you?
"I think it depends on how strongly you believe in these factor-tilt ETFs, or strategy ETFs, because if you are comfortable owning actively managed mutual funds in your portfolio as your core holdings, as many investors do, then there's nothing that would prevent you from owning these factor or strategy ETFs as your core holdings," says Lee. 
"The way I think about it is many of these ETFs are dirt-cheap or the best ones are dirt-cheap. So, even if they don't work out, so that is the supposed advantage isn't realized going forward, you haven't lost anything, if at all because these, especially iShares ETFs, charge close to passive management fees."
<a href="http://www.businessinsider.com/market-multiples-rarely-trade-at-mean-2014-2">The Single Most Important Observation For Anyone Who Buys Stocks Based On Value</a> (Morgan Stanley) 
The most basic measure of stock market value is the price-earnings multiple. And "market multiples rarely trade at average levels," writes Morgan Stanley's Adam Parker. This is crucial for anyone that looks at valuations before investing. The stock market rally in 2013 was largely driven by multiple expansion not earnings growth. So one shouldn't short the market just because the multiple is above its mean or vice-versa. 
 
<a href="http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2013.n15.1">Why A Blanket Ban On Commissions Won't Empower Investors</a> (CFA Institute)
70% of respondents of a new CFA Institute study said "inappropriate remuneration structures biased towards volume sales or specific products," are the main cause of mis-selling. 46% said the main consequence of banning commissions is that distributors will shrink their pool of offerings to those that they continue to get fees for.
"Transparency should be part of any solution aimed at addressing mis-selling because simplified disclosures would give investors the information they need to make informed decisions," Matt Orsagh, director of Capital Markets Policy at CFA Institute said. "It is also important to pursue uniformity in fee disclosures across jurisdictions to allow comparability of fees across markets, especially in the EU, where manufacturers can sell investment products across borders." 
"Our survey results indicate that CFA Institute members believe a ban on commissions will result in an investment landscape with less choice for investors and a market that under-serves, or does not serve, smaller clients." 
<a href="http://www.businessinsider.com/stock-market-1899-2013-2014-2">The Global Stock Market: 1899 Vs. 2013</a> (Credit Suisse)
The global economy and global stock markets have changed a lot in the last century. Credit Suisse is out with a chart that shows the relative market caps of global stock markets at the end of 1899, and at the end of 2013. "Markets that are not included in the Yearbook dataset are colored black. As these pie charts show, the Yearbook covered 98% of the world equity market in 1900 and 91% at end-2013."

Three Reasons Lower Correlations Don't Make A Stock Pickers Market 

<div class="KonaFilter image-container float_right"><div class="image on-image">REUTERS/Dylan Martinez</div></div>FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.
<a href="http://www.kitces.com/blog/the-real-hidden-cost-that-has-been-inhibiting-financial-planning-for-the-masses/">The Real Reason It Isn't Easy To Bring Financial Planning To The Masses</a> (Nerd's Eye View) 
The real challenge to bringing financial planning to the masses is not the technology needed to lower the cost of financial planning, according to Michael Kitces of Nerd's Eye View. "The real challenge is how difficult it remains to get new clients in the first place, especially given that so many financial planning firms have relatively little cash flow available for broad-based marketing programs."
This Client/Customer Acquisition Cost (CAC) is especially high in the financial planning world because it is hard to explain the service to the public especially when trust in financial services has been low. 
"The end result of these difficulties is that financial planning firms struggle to serve the middle class and mass affluent - not because it's expensive to provide planning, per se, but because the high cost to acquire clients leaves most planning firms under-capitalized and/or "stuck" with a relatively modest growth rate that necessitates higher prices simply to be able to afford to make a living," writes Kitces.
<a href="http://www.cfainstitute.org/about/research/surveys/Pages/global_market_sentiment_survey.aspx">Investment Professionals Think The US Will Present The Best Investment Opportunity But Are Concerned About Market Integrity</a> (CFA Institute)
Sixty-three percent of those surveyed in the CFA Institute 2014 Global Market Sentiment Survey said they expect the global economy to expand in 2014. This is up from 40% last year. 71% said equities were the asset class most likely to perform best, up from 50% in last year's survey. 26% said the U.S. would provide the best investment opportunity, followed by 10% for China, and 6% for Japan and Germany. Brazil was no longer on the list. 
29% of those surveyed said improved regulation and oversight of systemic risk was most needed to improve investor trust. 21% also said there needed to be more transparency in financial reporting and other disclosures. 
"Members do not think mis-selling of products by financial advisors is the most serious issue facing global markets in the coming year,"according to the press release. "Market fraud, such as insider trading (24 percent, up from 19 percent last year), use and reporting of derivatives (20 percent, down from 23 percent in 2013's report), and the honesty/integrity of financial reporting (21 percent, consistent with last year) are viewed as more serious issues." The annual survey measured the opinion of 6,561 CFA charterholders and members.
<a href="http://corporate.morningstar.com/us/documents/AssetFlows/AssetFlowsDec2013.pdf">Mutual Funds Look Set To Have Strongest Inflows Since 2009</a> (Morningstar) 
Long-term mutual funds have seen $258.8 million in inflows year-to-date (Ytd), and $14.5 million in November alone, according to Morningstar. These are on pace for the strongest inflows since 2009. Overall mutual fund assets are now up to $10.8 trillion, boosted by strong flows and stock market appreciation. Alternative mutual funds have drawn a record $37.1 billion Ytd, a 41% organic growth rate. 
Vanguard is expected to be the winner in terms of flows in 2013, with $65 billion in Ytd flows. Vanguard has come in first or second in terms of flows since 1994. Dimensional Fund Advisors came in second in terms of Ytd flows with $20.98 billion, and PIMCO came in third with Ytd flows of 19.99 billion. 
<a href="http://www.businessinsider.com/alliancebernstein-2013-investing-lessons-2013-12">2013 Taught Us 4 Key Lessons In Investing</a> (AllianceBernstein Blog)
Before diving into 2014, Seth J. Masters at The Alliance Bernstein Blog thinks it is important for investors to think about four important lessons from 2013.
1. "You have to be in it to win it" - "Staying on the sidelines may seem safe, but it also ensures a loss of purchasing power over time." 2. "If you run with the crowd, you can get trampled" - Doing so suggests that some investors are just chasing past returns, when they should really be establishing an investment strategy based on their own goals and risk tolerance. 3. "Diversification means owning some things that underperform" - It is important to maintain exposure to an asset class or a geographical region that isn't performing well right now, because it could end up doing very well. 4. "It's what you keep that counts" - Investors should watch for tax management strategies that could help them defer taxes or avoid them.
<a href="http://www.businessinsider.com/nyse-trading-commissions-since-1980-2013-12">The Cost Of Trading Stocks Has Been Tumbling For Decades</a> (Deutsche Bank)<a href="http://www.businessinsider.com/nyse-trading-commissions-since-1980-2013-12"></a>
The decline in the cost of trading has helped boost stock market trading volumes, according to Deutsche Bank's David Bianco. "Transaction costs related to owning large cap stocks have plummeted in the past few decades and remain low relative to most other assets," wrote Bianco. "We estimate that the competitive cost of owning a well diversified large cap equity portfolio has declined from about 300bp annually from 1960-1980 to under 1% today. Given that investment costs are tax deductible, we estimate that this decline should justify a 100-150bp reduction in the fair real cost of equity, all other factors the same."
<div class="KonaFilter image-container"><div class="image on-image">Deutsche Bank</div></div>

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Sebi working on AI tool to curb misselling by mutual funds: Buch

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