Execution only platforms (EOPs) – what does it mean for the investor?

Published: June 16, 2023 at 6:00 am

SEBI has created a new class of intermediaries called execution-only platforms (EOPs) for direct plan mutual funds. This will differentiate between an EOP and an RIA and provide clients with a clear grievance redressal mechanism. Those offering direct mutual fund investment portals are currently registered as investment advisors (RIA).

SEBI defines an EOP as “Any digital or online platform which facilitates transactions such as subscription, redemption and switch transactions in direct plans of Mutual Funds schemes”. This implies that these portals can no longer offer robo advisory or specific fund recommendations.

An EOP must be registered with AMFI as an intermediary, paid by the AMCs (EOP1), or registered with SEBI as a broker  (EOP2) and paid directly by the client for services by Dec 1st 2023.

We expect non-demat direct plan portals to become EOP1 making them “agents” of the AMCs (wording in the circular), and demat-based direct plan portals have a choice between EOP1 and EOP2.

Stock brokers currently offering only ETFs or both ETFs and regular plan MFs can become EOP2s and offer direct MFs independently.

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Now what does this mean for investors? Ideally, this ruling should make direct plan portals neutral without specific recommendations but only time will tell.

Many direct plan portals have been offering their services for “free”. Now they will be forced to choose between getting paid by the AMC or getting paid by the investor.

It is a no-brainer for them to become EOP1 and get paid by the AMC to claim they are still “free” to the investor. But what is the price of this association?

Will it differ from the association between AMCs and regular plan distributors sans the trial commissions? Will the AMCs nudge these portals to push NFOs or other preferred funds?

Unless they choose to become EOP2, these portals would lose their independence and that is an unwelcome step. If they choose to remain independent and charge the customer, the competition would gobble them up as most investors will not pay.

On paper, there are some safeguards in the SEBI circular: “no auto display of recommendation or ranking of any of the schemes” and only factual information about the schemes is allowed.

“The entity under both categories of EOPs shall not display any advertisement
regarding any Mutual Fund scheme on their platform. Further, they shall not
display any proxy/surrogate/common brand-related advertisement on their
platform.” We still have to see how this pans out in practice.

Will direct plans become more expensive? On paper, it should not be so – “AMCs shall not charge any fees/charges paid to the EOPs, to the schemes of the Mutual Funds.” Either way that does not worry us as much as the “direct” association between these portals and the AMCs.

Many newbie investors have di-worsified portfolios thanks to the “recommendations” of some of these portals. Hopefully, this rule change will curb this as they are meant to be execution-only and not provide advice but again let’s see how that goes.

In any case, we strongly advise newbie investors to “directly” invest with AMCs. If, for some reason, this is too restrictive, they can choose the AMC-run MF Utility or the RTA-run MF Central.

In summary, this ruling implies that direct plan portals have lost their independence unless they choose to charge the customer which does not make business sense given what the customer is currently used to. So from this viewpoint it is a negative step. However it could also mean (at least in theory)  a truly neutral shopping mart for direct plans. So it is a mixed bag and we need to track its evolution closely.

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