The deadline for registering as an investment advisor under SEBI Investment Advisors Regulations has expired on 21st and apparently only 70 have registered. Clearly, nobody wants to advise; they want to sell products are earn commissions, a reality SEBI failed to realise, despite clear writing on the wall, highlighted repeatedly by Moneylife

The October 21st deadline to register with SEBI as an investment advisor under the new regulations has expired. So, so far, how many have got their certificates? According to SEBI website, as on August, only 11 investment advisors got their certificates under the controversial Securities And Exchange Board Of India (Investment Advisers) Regulations, 2013 (Regulations).
 

According to Business Standard newspaper, as many as 70 investment advisors have registered with SEBI, but are yet to get their certificates. Still, this is an abysmally small number to service a country with millions of retail investors. Retail investors will continue to be serviced by distributors who sell products for a commission. Sebi had hoped that it would promote a new breed of intermediaries – investment advisors -- who will offer advice for a fee. It is apparent from the low turnout that in the six months, the grace period, since the Regulations went into effect on 21 April 2013, many advisors decided that it was better to give it a pass.
 

Moneylife had pointed out that is utopian because customers don’t want to pay for advice since the merits and demerits of the advice is known only later. Also, intermediaries make much more money in selling for commission rather than advising for fee. On the other hand, SEBI expressed their shock and surprise at the low turnout. Ananta Barua, SEBI executive director was quoted in Business Standard saying, "We did not make these regulations immediately applicable. We gave a lot of time...That is why I am surprised the applications received are very few." If Sebi officials were not living in an ivory tower, they would be less surprised.
 

Moneylife had written why and how SEBI's idea, though well-intentioned, were half-baked and possibly would lead to unintended results and low turnout. We also wrote that the new rules will only alienate many honest advisors, who earn an honest living by selling products and advice.
 

You can read out earlier pieces here:
 

Investment ‘advisors’ ignore SEBI; just 11 registrations so far
 

Investment Advisor Regulation I: SEBI’s ideas are, as usual, far from reality; may increase mis-selling!
 

The whole idea of the Regulations was to remove conflict of interest between and thereby reduce mis-selling, by separating product selling and advice. In other words, to be an investment advisor, you have to choose between selling a product or advice, not both. One honest advisor told Moneylife, “I will not be a surprised if (these) so-called investment ‘advisors’ work closely with ‘agents’ wherein the agents would give a pass-back of the commissions they earn to advisors who recommend customers to them. This currently happens as well, but it is more open as there is no restriction, where financial planners have tied up with agents of certain companies. Though the commissions are not disclosed, they earn enough for passing on a lead to an agent.”
 

When this happens, it will be even more difficult for SEBI to clamp down on such incidents and would be harder to prove the links between advisor and agents. If the agent and advisor sit side-by-side in two desks of the same bank, so much the worse.
 

Another major deterrent is the cost of compliance. Most of the advisors are either single-person entities or small businesses. It is estimated that there are roughly 1,755 certified financial planners in the country. However, with the new regulations, there is more work that needs to be done by filing more compliance reports, audits and inspections -- all of which are time consuming, costs more (both in terms of overheads and labour cost). A single-person advisor will probably spend more time complying with SEBI's regulations than helping consumers with their financial plans or advising them on staying away from harmful products. This will affect the profitability of the business.
 

This is exactly what happened to mutual fund distributors when SEBI banned entry load. Most went out of business. Even more so, Moneylife found out that when SEBI introduced another cost measure known as total expense ratio (TER), mutual fund returns, over the long term, were actually LESS than the returns when entry-load was in effect. Basically, with the entry load ban and TER regulation, SEBI not only drove small distributors out of business but also made mutual fund investing unattractive for long term investors.
 

The long term ramifications of the Regulation are unknown to those who already have registered and will be known over time. But one thing we do know is that many small investment advisors are shunning from registering and possibly moving on to something else, much to the dismay of the consumers who badly need quality advice and products.