With the new Regulations from SEBI, the tribe of investment advisors will hardly grow in India as there is too much of responsibilities with limited freedom
The idea that investment advisors need to be regulated is not at all a subject of debate. In the US, Investment Advisors Act was passed in 1940. UK carried out several changes in the regulation of financial advisors from 2012.There are many other countries, which regulate investment advisors also called as financial planners. In India, the need to regulate investment advisors originated from many factors out of which two are very important factors which are as follows:-
a) Holding advisors accountable for what they suggest to the client and;
b) Ensuring that advisory business is not mixed with selling of financial products.
With a view to make financial advisory business more accountable, SEBI came out with “Investment Advisors Regulation”. From 21 October 2013 only those who had registered under the regulation with SEBI would be able to offer investment advisory services.
With the Investment Advisors Regulation coming into force, SEBI has received only limited number of applications for registration, with number of investment advisors barely crossing even 100 in a country, which has probably more investment advisors than investors at the current juncture. One of the obvious reasons is that many people are not keen to give up their business of selling financial products and just be investment advisor where the cash flow is not assured, but the matter does not end here.
Let us look at some of the obvious reasons for poor response to this regulation.
Investment advisors not classified based on business activity
SEBI classifies an investment advisor as either individual, partnership firm or a body corporate. Rather than doing this, SEBI should have classified investment advisors based on the volume of business they handle. For instances in USA, investment advisors that have "assets under management" of $25 million or more need to register with SEC and rest others can register with state securities commission. Though India has no such structure, the idea is to highlight the fact that investment advisors should not be treated at legal structure level but at the level of business they handle. A business investment advisor with higher level of activity can afford more costs than an investment advisor having a handful of clients.
Fees charged and cost of compliance are very high
The investment advisor regulation states the following with respect to the fees to be paid by investment advisors:
But this is not the total cost that an investment advisor has to pay. There are costs associated with infrastructure, maintain of records, audit costs etc. Net worth requirement can also act as a minor deterrent. The advisory business in India is in a nascent stage. It is difficult for investment advisors to charge fees to the clients. Also, with the market being so competitive and in absence of a level playing field, charging any decent fees by investment advisors is very difficult and challenging.
The grey areas in investment advisory guidelines are anti-investment advisor
Read this statement which is directly produced from the act: ” Whenever a recommendation is given to a client to purchase of a particular complex financial product, such recommendation or advice is based upon a reasonable assessment that the structure and risk reward profile of financial product is consistent with clients experience, knowledge, investment objectives, risk appetite and capacity for absorbing loss”. There is so much of subjectivity in this statement that an investment advisor will like to keep away from such products or has a risk of not meeting compliance requirement.
It is indeed doubtful that, with current guidelines, the tribe of investment advisors will grow in India. There is too much of responsibility with limited freedom. The cost is big de-motivating factor and compliance requirements are draconian. The guidelines are too investor-friendly and offer very little to the advisors. It is now, the right time to declare investment advisors as endangered species.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
PROVIDENCE, R.I. — Joseph Caramadre believed he had found the Holy Grail for investors, a risk-free way to speculate in financial securities — all upside with little or no downside. All he needed to make it work were people who would soon be dead.
On Monday, in a federal courtroom in Rhode Island, the scheme ended with a six-year prison sentence for Caramadre.
"Joseph Caramadre saw death as a holiday, a cause for celebration, a way to make money," U.S. Attorney Peter Neronha declared on the courthouse steps downtown. "He stole the identities of people and used it to make money from companies who should have probably done more due diligence."
The sentencing came more than a year after Caramadre and an associate pleaded guilty to conspiracy and wire fraud charges. In part, the delay was caused by Caramadre’s failed effort to rescind that plea.
ProPublica wrote about Caramadre in August of 2012, describing how the Rhode Island attorney and accountant fashioned his strategy around variable annuities that carried death benefits, payable if the annuitant died.
Before the financial crisis, insurance companies were so eager to sell these annuity policies that they didn't check the health of policyholders. In exchange for a small amount of money, Caramadre, 53, and his associate, Raymour Radhakrishnan, 29, convinced terminally ill people to serve as "measuring lives" on the policies.
Caramadre then lined up investors who put in much greater sums. When the sick person died, his investors would either reap the death benefit — usually at least the initial amount invested — or any gain from the investment, whichever was greater.
Toward the end of the scheme, Caramadre branched out to so-called death put bonds. These also had death benefits that allowed the holder to reap the full price of the bond even if it had been purchased at a discount.
When prosecutors began investigating in 2009, they found family members who claimed that, while their loved ones took the money, they hadn't fully understood the scheme. There were also allegations that some terminally ill participants had been purposefully deceived about the nature of what they were signing and even in a few cases had their signatures forged. Most of the contact with the terminally ill was left to Radhakrishnan.
"While the nature of the victimization of the terminally ill was not monetary, it was a very real emotional and psychological victimization," U.S. District Judge William Smith said at the sentencing.
Smith remarked several times during the hearing, however, about how "difficult" and "complex" the case was, even suggesting that but for a few allegations it might have been a civil rather than a criminal case.
In court filings and publicly, Caramadre has denied the prosecution’s accusations, saying that he instructed employees to properly explain the program to the annuitants and would never countenance forgery by an employee.
Four days into a trial last year, Caramadre and Radhakrishnan pleaded guilty to two counts of a 66-count indictment. Shortly after that, Caramadre tried to take back the plea, blaming chronic depression and his wife's nervous breakdown.
Smith didn't buy the argument and sent Caramadre to jail, where he’s been for seven months. The judge said the attempted plea change was a factor in the sentence he handed down, calling it "an incredibly cynical effort to manipulate the court."
Smith also sentenced Radhakrishnan to a year and a day of prison time, plus six months of home detention.
In his heyday, Caramadre operated a successful estate planning business and gave millions to charities and politicians. Now few charities will acknowledge that he was a donor, Caramadre said at the hearing. And his contributions have become political kryptonite.
One investor in his scheme was Terry McAuliffe, now the Democratic governor-elect of Virginia. Caramadre briefly became a factor in the Virginia governor's race last October when The Associated Press incorrectly reported that McAuliffe had "lied to a federal official" during the Caramadre investigation.
The report erroneously assumed that a "T.M." mentioned in the Caramadre indictment was McAuliffe even though the person with those initials was identified in a prosecution document as having worked construction, an unlikely pursuit for McAuliffe.
McAuliffe subsequently donated $47,000, approximately what he had made as a passive investor in Caramadre's scheme, to the American Cancer Society. McAuliffe's campaign also donated another $27,000 that Caramadre had contributed to his candidacy.
Caramadre, a devout Catholic, placed ads in the newspaper of the Roman Catholic Diocese of Providence in an attempt to find terminally ill participants.
The ads promised $2,000 to all who responded, and Caramadre gave that amount to as many as 135 people without enlisting them in his scheme, he said in today's hearing. Those who did participate usually received between $3,000 and $10,000.
Judge Smith said he will call a separate hearing to determine a restitution amount to be assessed against the defendants in the criminal case.
India is reacting sharply after its deputy consul general Devyani Khobragade was arrested and handcuffed in public in New York on visa fraud charges last week
Escalating a diplomatic row, India on Tuesday asked the US to return IDs issued to all its consular officers posted in the country. This move may be a precursor to reviewing immunity and benefits enjoyed by US officials in India as a protest to the treatment meted out to the country’s deputy consul general in New York.
Indian government sources said, “Government has asked the US to return the ID cards given to their consular officers posted in India”.
It is understood that the government intends to review the immunity and benefits enjoyed by US diplomats.
Significantly, the review comes after India reacted sharply to deputy consul general Devyani Khobragade being arrested and handcuffed in public in New York on visa fraud charges last week by summoning US Ambassador Nancy Powell and issuing a demarche in this regard.
The displeasure was also evident among leaders and officials of Indian government. Home Minister Sushilkumar Shinde today cancelled his meeting with a senior US Congressional delegation ostensibly as a mark of protest against the treatment meted out to Khobragade.
Yesterday, Lok Sabha Speaker Meira Kumar had cancelled her meeting with a senior US Congressional delegation due to the same reason.
National Security Advisor Shiv Shankar Menon, who also had a scheduled meeting with the five-member US team, did not meet them, apparently for the same reason.
The delegation comprised Congressmen George Holding (Republican – North Carolina), Pete Olson (Republican – Texas), David Schweikert (Republican – Arizona), Robert Woodall (Republican – Georgia), Madeleine Bordallo (Democrat – Guam).
39-year-old Khobragade, a 1999-batch IFS officer, was taken into custody last week on a street in New York as she was dropping her daughter to school and handcuffed in public on visa fraud charges before being released on a $250,000 bond after pleading not guilty in court.