The Securities Exchange Board of India (SEBI) has issued a consultation paper for amending the Investment Advisors (IA) regulations, originally released in 2013.
The IA regulations are a set of guidelines or requirements related to qualification, certification, and other general obligations for investment advisors.
The consultation paper proposed higher compliance requirements, allows IAs to play a dual role of distributor and advisor, tries to standardise calculation of fees and fee limits, and other such proposals.
Financial planners and advisors feel the new proposals, if implemented, could hit business and increase overhead costs.
1. Cap on fees
SEBI has proposed that IAs charge fees either as a percentage of the total assets under their advisory OR a fixed fee. The regulator has proposed a cap of 2.50% on fees based on AuA (assets under advisory), and a cap of Rs75,000 on fees based on fixed prices.
Currently, IAs have the freedom to decide on the fees to be charged to customers.
This approach considers different expectations and requirements of individual clients, and this works fairly well as investment advisors also provide other value added services like tax filing, and estate planning.
But SEBI’s intervention in this matter would leave IAs juggling both client requirements and adhering to guidelines, a process that would waste time and resources.
Further, SEBI has proposed that IAs can only collect advance fees for up to two quarters. This is contrary to the standard industry practice of collecting the entire year’s fees in advance, or if it is a higher sum, only then in a couple instalments.
This move will double the efforts put into customer retention and fee recovery, leaving less time for the core advisory function.
2. Higher compliance, net worth requirements
SEBI has proposed that individual IAs would require a net worth of Rs10 lakh, against the current requirement of Rs1 lakh. Corporate IAs would be required to maintain a net worth of Rs50 lakh, higher than the current Rs25 lakh.
The net worth of IA is of no relevance to clients. This move would eliminate small and upcoming IAs aspiring to grow their business. Besides, there is no correlation between net worth and service quality. A higher net worth does not translate into better quality of advice.
Besides the higher net worth requirements, SEBI has proposed a higher compliance check on the activities and services rendered. This includes checks by auditors on whether the same client is not offered distribution service along with advisory, requiring clients to sign a terms & conditions form mentioning all the scope of services, function of the advisor, risk factors and disclosures and a separate compliance audit.
This bureaucratic process forced upon IAs is completely fine if it were a standard practice applicable to everyone involved in some or another type of investment advisory.
But the fact is that distributors and agents, who do not fall under the ambit of IAs yet continue to falsely represent themselves as one, have no consequences to face even after deliberate mis-selling of wrong investments.
We cannot have IAs burdened with so many restrictions when another group of distributors and agents provide the same type of service, earn fat commissions and easily get away with it.
Ideally, all types of investment products including investment-cum-insurance schemes should be sold only by an IA. Having these separate branches, one to advice, another to sell, has only seemed reasonable in theory but ineffective in practice.
Disclaimer: Our associate Moneylife Advisory Services is a SEBI-registered Investment Advisor