Investment Advice Will Not Reach the Masses if SEBI Regulations Are Implemented Strictly and Customer Needs Ignored
Media reports suggest that the Securities and Exchange Board of India (SEBI) wants to redefine the services of research analysts (RAs) and investment advisers (IAs), by tweaking the regulations that govern them, once more. Let me start with a disclosure. I run a firm regulated by SEBI, so my views may be coloured. However, I have insights into what investors are looking for, a thing that non-practitioners may not be aware of. 
SEBI brought IAs under its regulatory ambit in 2013 and RAs in 2014. IAs are supposed to be like family physicians, who know the health history of every member of the family. What a doctor knows about health, the IA is supposed to know about wealth. But that is where the analogy ends. 
If the regulatory burden on doctors is 10 on a scale of 1-100, it is 100 for IAs. And doctors are dealing with our life! 
SEBI regulations of 2013 and 2016 already covered mandatory risk-profiling of clients, suitability of products recommended and recording the rationale and suitability of every piece of advice provided. IAs must have a documented process for selecting investments based on the client's objectives and financial situation and have a reasonable basis for believing that a recommendation or transaction entered into meets the client's objectives and risk profile, among other things. These regulations are getting tighter and tighter. 
In 2019-21, SEBI came up with further extensive changes. In December 2019, there was an ad hoc circular. On 23 September 2020, it issued new additional guidelines – just two months after extensive changes were announced in July 2020
As a result of these changes, IAs cannot accept fees through credit cards, will have to sign a 26-clause investor agreement, and have to maintain physical records written and signed by IAs, telephone recording, emails, SMS messages and any other legally verifiable record for five years. 
All this may be well-meaning, but is it practical? 
IAs will need an army of people, including administrative and tech staff, to be compliant. If a doctor were supposed to sign a 25-page form with each patient and maintain records of every conversation and the reason behind every prescription for five years, plus get all this audited every year, he would barely be able to see a few patients in a whole day. His charges would shoot up and medicare would become out of reach of most people. 
The heart of the issue is SEBI's idea of a model investment adviser. He has to go into every financial detail about clients, including goals, preferences, borrowings, current investments, savings, expenses, personal taxation and so on and offer advice on all of them holistically. 
What SEBI has in mind is reinforced in the extensive case studies IAs have to read to pass the mandatory test run by the National Institute of Securities Market (NISM) every three years.
While SEBI may want advisers to extract extensive data and provide highly customised service, clients themselves are often unwilling to share details. Some want to use the services of multiple advisers, while others have justifiable trust issues. 
At the other end of the spectrum, financial entrepreneurs running fin-tech are salivating about transplanting the wild success of consumer technology (like Amazon) onto the financial world. They want to register millions of customers in a matter of months. Such rapid scale can be achieved through a combination of minimum click-throughs, no physical processes, and closing the entire customer experience within minutes. 
It is impossible to do this under the current regulations, even though fin-tech as well as SEBI have the noble objective of ensuring that rational investment advice reaches millions of people. In the eyes of fin-tech, SEBI's model of physical IAs offering customised services belongs to the Stone Age. At the moment, fin-techs that offer advice and cookie-cutter risk-profiling are flouting SEBI rules without consequences. 
What Consumers Want
The bigger question is: What do customers want? Does each customer want the Saville Row equivalent of financial advice or are some okay with an off-the-rack T-shirt? Remember, financial planning is sold, not bought. 
Seeing a doctor is a necessity for one who is ailing; sitting in front of a financial planner is not.
Of the thousands of queries we have received from clients, 80% fall into three broad types: One, I have Rs5 lakh of surplus lying in the bank; where should I invest it? Two, here is my portfolio. Should I hold these shares or sell/ switch? Three, what is your opinion of the following stocks or mutual fund schemes?
Under current SEBI regulations, IAs cannot answer any of these questions without going through the entire rigmarole of extensive financial planning. 
How does fin-tech deal with the physical process that SEBI demands? They can't. They have made up processes that violate SEBI rules. 
A decade after robo advisory started in the West, SEBI mentions it in a discussion paper of 2016, but regulations do not permit it. But it is being offered with impunity without facing regulatory action. 
One kind of service that has come up to address customer needs (model portfolios), blurs the distinction between what RAs are supposed to do (issue research reports on single companies) and what IAs are supposed to do—recommend a portfolio of stocks. 
Sadly, a few of the SEBI's rules are vague, but the regulator showed no leniency when IAs have violated what SEBI had apparently intended. In effect, the gap between what customers need, what they want, what fin-techs are offering and what SEBI regulations demand of IAs, is far too wide. I am eagerly waiting to see how a new discussion paper bridges these gaps.
(This article first appeared in Business Standard newspaper)
8 months ago
Every person in SEBI should take an exam every 3 years like what is mandated for us. If they dont clear they should not continue. Income tax rules change every year. Can CAs be mandated to clear an exam every year to retain their license?
1 year ago
All Registered RIA should look for other options. The compliance is very heavy and extremely vague. Not worth your time and effort.
Kamal Garg
1 year ago
Some one in a large PSU bank told me that they purposefully insist on getting all relevant and irrelevant papers and documents from their clients with certification and self-attestation on each page just to prove that they have taken all the papers required and even after that if the party has fled the country, it is not my fault. All government departments work on the same principle - save your neck (there is a better word for that also) and therefore they purposefully make the process so lengthy, bureaucratic and frustrating that a sincere person does not venture to go for all such things whereas persons like Nirav Modi and Choksey go around the world with impunity.
1 year ago
As a SEBI-registered RIA, you have nailed it with this brilliant piece! Sadly, I'm not optimistic.

I have not scaled up my practice precisely because of all the stupid rules and regulations. There is no word to describe the mindset and culture of our regulatory authorities across North Block. The closest adjective is "stupidity". So much for the "ease of doing business" in India.

Here's a wise suggestion: Don't expect much from the new "discussion paper". It's a joke. It's fodder for Comedy Night. Enjoy it with friends and beers. And then sleep knowing tomorrow is never going to be better than today. YOLO.
1 year ago
I applied for RA certificate from SEBI , they have raised 42 queries thrice , even though i have replied to all of them patiently. One of the queries they raised has gotten too far which i shall explain, regarding Educational qualifications. I am an Engineer , who worked in Banking for 16 years as Credit sanctioning authority analyzing financials of Small and Medium companies and also Retail Loans. Also i have completed Executive Programme in Applied Finance from IIM Calcutta, where the subject of Investments have been dealt in Detail. SEBI says I am not qualified suitably. I have 10+ experience and also IIMC certificate + Professional degree, as per their Circular. Before accepting the processing fee on their website online , their online application should not have accepted my application , if i am not eligible. And they don't want to clarify issues in a professional manner. Whereas they have issued the same RA license recklessly few years back , to many people who are not qualified and also not practicing as of date.
Replied to SHASHIKIRAN comment 1 year ago
You're better off not becoming an RIA -- for the time being -- until sanity prevails in North Block. The compliance is just not worth it. Trust me.

Source: I'm a SEBI-registered RIA.
Replied to adityag comment 1 year ago
Hi, Is there a number I can reach you on? Wanted to get some insights into the RIA process.
Replied to adityag comment 1 year ago
I agree with you 100%. I m better off
Free Helpline
Legal Credit