- The debate about transparency in the relationship between the customer and the mutual fund agent reminds me about the debate which took place a long time ago on the transparency in the relationship between the customer and the BSE broker. In the bad old days, when you purchased shares, the BSE broker gave you a consolidated bill for the consideration which you had to pay. You were not supposed to ask what was the actual execution price at which shares were bought and what was the markup charged by the broker. It was as bad as buying a currency forward from a bank.
Thanks to SEBI's pushing, transparency came into the contract note of the BSE broker: today the contract note clearly shows the price at which the share was bought on the market and the markup charged by the broker. The same can and should be done with mutual funds.
- The second dimension is the extent to which the mutual fund agent is conflicted. I feel the mutual fund agent must be required to first show the customer a tariff card containing the fee earned by him on all the various products that he sells. This will help the customer have an better perspective on what advice is being given out.
And, Mobis Philipose has an article on the unique governance challenges of financial exchanges. I have long argued that profit-oriented and valuation-focused exchanges present difficult problems, particularly given the weaknesses of the legal system and regulation in India. See: link, link.