Investment advisors to become rare species, thanks to SEBI Regulation

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:

  1. Every applicant shall pay non-refundable application fees of five thousand rupees along with the application for grant or renewal of certificate of registration.
     
  2. Applicants which are individuals and firms shall pay a sum of ten thousand rupees as registration/ renewal fee at the time of grant or renewal of certificate by the Board.
     
  3. A body corporate shall pay a sum of one lakh rupees as registration/ renewal fee at the time of grant or renewal of certificate by the Board.

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.)

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    COMMENTS

    wealth buildup

    2 years ago

    Thanks for sharing useful blog. it is helpful for us.

    saurabh kumar

    4 years ago

    what about small investors in India with investment is very small

    Jay Abraham

    6 years ago

    Q1. If you are educating an individual on the various investment instruments available out there, but not advising about any specific stock (RIL) or a specific mutual fund (HDFC Large Cap) or a specific corporate bond (Muthoot Bond), do you need any licenses then?

    Q2. I'm a little confused as to the license required for an Investment Advisor who earns a commission from the investor and/or products like a Bank's employee VS the license required for a Financial Planner who advises based on a fixed fee like Mr. Taresh.

    Thanks.

    Jay Abraham

    6 years ago

    Q1. If you are educating an individual on the various investment instruments available out there, but not advising about any specific stock (RIL) or a specific mutual fund (HDFC Large Cap) or a specific corporate bond (Muthoot Bond), do you need any licenses then?

    Q2. I'm a little confused as to the license required for an Investment Advisor who earns a commission from the investor and/or products like a Bank's employee VS the license required for a Financial Planner who advises based on a fixed fee like Mr. Taresh.

    Thanks.

    Sam

    6 years ago

    These days there are so many stock market tips provider. Do they all need to be SEBI registered Investment advisor to continue doing so?

    Taresh Bhatia

    7 years ago

    Greetings and Namaskar!
    Commenting on your views: We feel that those who are on the right side of the law, needn’t be afraid of the regulations, don’t need to fear the law while those who wish to make around the law can do so in any case, wo why fear!
    We are proud to announce that SEBI has accepted our application and granted our firm Advantage Financial Planners LLP Certification as "SEBI Registered Investment Advisor" (RIA). This is a very proud moment for us as we have qualified after due diligence and based on our systems processes and service quality. We are also proud to be amongst the three LLP to be given this certification in the country till date and perhaps, the only one LLP in Delhi NCR.
    This gives us lot of confidence and renewed energy to give fee based advice to our clients and offer unbiased opinion. Why wouldn’t the clients pay us fee as it is based on our expertise, knowledge, experience, transparency and added value.
    Would be happy to remain in touch at [email protected]
    Also, I, as one of the partners, am happy to be “EXEMPTED” as SEBI has notified that RIAs who have "Certified Financial Planner" Certification from FPSB India will be exempted from above NISM Exams to be eligible;

    REPLY

    Gautam Haldipur

    In Reply to Taresh Bhatia 7 years ago

    Dear Mr. Taresh Bhatia,
    At the outset I wish to congratulate you on your obtaining SEBI certification as an RIA.I have gone through your write up with care. Whilst it is nice to see our Professional colleagues going top notch on Advisory, I do have some apprehensions, which of course I will be glad if you could elucidate further to help your professional colleagues better.
    1.The issue is not the FEAR of Regulation but of unbriddled / unrealistic regulation which is inequitable & short of the principles of Natural Justice enshrined in the constitution which gives an equal opportunity to one & all to live & let live.It should not be meant to snuff out a few but to carry as many as possible along with proper checks & balances which is undoubtedly missing. While saying this, I would without doubt welcome fee based advisory which will be the ultimate. But the need of the hour is to metamorphose into that phase than jump the gun.
    2.The Concept of an Advisory as it stands today is largely restricted to the large Metros & few cities, whereas large parts of the country are miles away from it nor do they have the remotest idea of the concept barring a few.I am sure you well understand that large untapped potential lies in the smaller towns & villages of India which have a dire need for these integrated services which are missing.How do you plan to address the same?. Will you kindly share it with your colleagues?
    3.The diversity & Demographic profile of our country is so large & complex that the investing habits/ psyche of people are equally diverse.You might be pleased to know that this complexity of our country is an outstanding feature at that! Despite that we are kicking & alive!Learning from other nations is most welcome but aping everything is not required. Understanding our own Endemic situation is far more important while legislating.I can say this conviction having travelled almost across the length & breadth of our motherland.
    4.The biggest THREAT ( not fear mind you) you are likely to face is that of hostile litigation which can be unbridled & unfettered.It is not the fear of the law of the land but the likely blatant misuse of the portents of interpretation that can cause potential damage to the fragile nature of Trust. At the level you operate I am sure you are aware that you are an an Intermediary & not the product innovator. The quixotic situation around is that the current regulation lays the onus on the intermediary & not the innovator who understands & brings out the product.The right mix should have been the innovator certifies the product as of a certain category ( like Blue/ Brown etc.).The moot point is, has the innovator done enough to qualify the intermediary to advise on that product?. There is a yawning gap at this level which needs to be bridged.You cannot put only the intermediary in the dock for professional misconduct. The innovator is in every measure responsible to ensure that his product is sold correctly / advise rendered correctly.Can I have you views on this? I shall be obliged if you can enlighten me further on this.Let me restrict myself to this now before saying that there is a lot more that needs to be addressed.Thank you.

    saurabh kumar

    In Reply to Gautam Haldipur 4 years ago

    ask him sir i need advice willing to take his service will he come to Samastipur Bihar

    Taresh Bhatia

    In Reply to Gautam Haldipur 6 years ago

    Hello,
    At the onset, let me say, you have views and so do others and we must respect them.
    What you mentioned can be a very broad prospective which IS A BIG DEBATE!
    1)I mentioned that it is better to be on the right side of the law, so we chose and we feel great about it. thats it, nothing in choosing.
    2) potential in rural or urban areas is of course equally great and dont wish to advocate so vast subject. Our choice of fee based services going forward gives our clients to choose their intermediary while gaining from our knowledge, expertise, unbiased opinion at a miniscule cost
    3) legislation and implementation are two different spheres, agree. of ourse huge potential accross the country and some learning is surely welcome from other countries.
    4); no threat! the government has to look in to these issues.
    We msut enjoy what we do and feel great about doing the same!
    Having done CFP and now RIA certification brings more confidence to do what we feel is right and choose our clients meanwhile who can pay for our fees.
    hope I could bring in some air while you are welcome to contact me for more discussions, thank you-Taresh

    Gautam Haldipur

    In Reply to Taresh Bhatia 6 years ago

    Dear Tareshji,
    Thank you so much for your kind, prompt & cryptic reply which I sincerely appreciate.Whilst I might agree with you on many things, I beg to differ on point 4 viz. THREAT- this will not be dealt by the government but prima facie by SEBI as a quasi judicial body & then by the Courts of the land meaning avoidable litigation.I fully agree that I have started a Full fledged debate on this, which being in Delhi, I sincerely hope you can carry to the powers that be as it is logically easier doing that. In this you can count on my support in the larger interest of the fraternity. Thank you

    saurabh kumar

    In Reply to Taresh Bhatia 4 years ago

    very true sir

    saurabh kumar

    In Reply to Taresh Bhatia 4 years ago

    very true sir

    sreenath

    7 years ago

    sathyacumaran
    operational head india
    singapore media and channel group
    thanks for sebi in imposing an strigent rule on investment advisors we as an international journalist we get quiet alot of compliants from stock brokers who cheat their client using their POA and margin funding even though the client had given for revocation of POA and margin fudning none of the broking fund had revoked and as such the client are cheated and i was one of the victim and we have raised this issue with sebi and nas and bse no response and as such i would request the money life paltform to take this issue and do justice for the media and channel personality hoe this would be considered and if you just passa word to sebi chairman or bse or nse chairman qutiomatically justice would be arrived we are sure that NGO organisation like money life has good say in the media industry in india since we donot have any local base in india we have to bring it from our platform which would be disgrace to country like india that when we expose the official corruption in sebi nse bse this would demoralsie the investing community but if your organisation take this issue in more soft manner we expect that justice could be achieved for me hope you help the fellow media persoanlity this an small obligaiton laid by singapore media and channel group

    REPLY

    Gautam Haldipur

    In Reply to sreenath 7 years ago

    May I humbly correct your perceptions of India as we go forward? Please look into the following points in depth:-
    (1) Corruption is an issue which we all are fighting & is admittedly an uphill task. But making sweeping allegations like SEBI is corrupt, NSE is corrupt, officials do not apply their mind etc. are highly uncharitable remarks.I have followed the functioning of these organisations right from the time of their inception. They have fairly good mechanisms in place for problem resolution. I might admit that there are still many shortcomings on this front.You have different levels to get your grievances redressed. Kindly explore the same.
    (2)From what you have written it appears that you have been into a PMS(Portfolio Management Scheme) in which POA's are given.You need to go through the fine print before you sign up for such mechanisms which can be open to abuse.You might, if you prefer ask your own safety clauses to be included which to a larger extent will keep you safer.
    (3)Pure individual Financial Advisors are a different class altogether. Please note that this is a section of the Industry which as it stands today suffers a negative return today because of overzealous, one sided regulation.If you do have an issue with them in the Mutual Fund Industry, please bring it to the notice of AMFI & my guess is you will have it addressed properly, with of course a copy to SEBI, the regulator.I might agree with you that many investors could have had bad experiences.Please note that we are, as a Country, in a transition phase & are bound to have hiccups. But please be informed that the learning curve is allowing us to build in far more robust, flexible & accomodative regulatory processes than the world over.It is a fact that we, ourselves have issues which we are agitating & getting them resolved by & by.
    (4)While it is within your democratic rights to have your problems resolved, may I make an humble request that reckless & unbriddled criticism across the board be avoided. Do not hound an entire breed because of a few Black Sheep ( the Black Sheep have to be brought to book without doubt).I hope you will read me in the right spirit & proceed accordingly. May I conclude with utmost profound Regards.

    Gautam Haldipur

    7 years ago

    Dear Mr.Vivek Sharma,
    Thank you for bringing out this article. All the people concerned should know the facts as they are without mudslinging at a particular group. It is a well known fact "BLACK SHEEP" do exist in every field. Just because there are a few Black Sheep in a particular industry hitting everyone below the belt is patently unjust & draconian.Let it be known that people in the Advisory Industry (if I might call it so)as it stands today are in it for the long haul. Those who were in it for quick short term gains have been spilled out of the industry by one single regulation i.e. banning upfront entry loads. The industry by default has shed itself of "fly by night operators". Those of them who continue even today (at least majority of them)are serious players who more or less understand the business very well & have hence continued with firm resolve.Now, by trying to refine them as Distributors & Advisors again separating these 2 functions is only going to compound the confusion further (just like we have EUIN across the Board instead of only for corporates who have employees). Let us remember that this might, read my lips, might hold sway in Metros where people understand the difference. What do we do with smaller towns & villages where dissemination of information is next to absent. These dual classifications will completely destroy inclusive growth envisaged by the powers that be at the village level as it will be nearly impossible to meet these requirements. As said by you the risk-reward ratio is negative & the advisor runs the risk of hostile litigation by dubious elements. Regulation per se is welcome, but it needs to be just, equitable & based on the principles of natural justice creating a level playing field for all concerned. However, if it tends to become one sided, then less said the better of it, meaning what you are seeing now; a dwindling breed of advisors / distributors.Let us not ape the west blindly, but take the best principles in them that would suit our country's endemic situation so that we have a UNIQUE LAW that makes all the stakeholders happy & conducive to each other. Our country's situation is far more complex than the west due its diversity in ethnic composition. To say the least, the western economies are EXPENDITURE ECONOMIES while we are a SAVINGS ORIENTED ECONOMY & that precisely makes a huge difference in the approach we need to have. Yes, we can imbibe what is good & suits our economy while it is equally important to peer into the pitfalls of the western economies & their laws so that we do not fall into such traps like the west.I hope I am taken in the best spirit with an open mind by all at the helm.

    sathyacumaran

    7 years ago

    sathyacumaran
    operational head india
    singapore media and channel group
    thanks for moneylife maiden effort in curtailing the investment advisors similarily the cheating broking houses should also be made accountable and there are many broking houses like India infoline stock broking firm where they try to pool alot of money from general public in form of non convertible debentures and the chairman also had informed that he had plans to close his share broking business and as such since we donot have solid basis india like madam Sucheta Dalal who his an PadmaSri award we request to do justice to my case help me

    Boodugere Nagaraj

    7 years ago

    It is really surprising that even after four years, you are still waiting for the things to change. IFAs are respectable, knowledgeble and cultured lot. They have been humiliated and treated in a cheap manner. If you have any shame, come out gracefully. Enough is enough.

    jaideep shirali

    7 years ago

    The regulator formulates rules without heeding industry voices. These rules seem to be a cut and paste job. Does any SEBI official understand the effort goes into selling investment products, especially mutual funds? Ironically, as per SEBI requirements,"Mutual fund investments are subject to market risk" and "Past performance may or may not be sustained in future..." are standard mutual fund disclaimers. So, if an investment goes wrong, who is to blame? Is it realistic to expect an investor sit through an investment interview and sign one more form, when typically, investors just sign the cheque and the form in the correct place and leave the advisor to fill in the form ? And what sort of compliance structure does an individual have? Too many questions and sadly, no answers. Yet the rules multiply, while business stagnates or dwindles.

    sathyacumaran

    7 years ago

    sathyacumaran
    operational head india
    singapore media and channel
    All these guidlines of SEBi or AMFI are only in paper and for publicity and not for implementation because the sebi and other govt missioneries related to capital market are one most corrupt organisation this is known to one and all that is reason why even oru FM had told when the NSE counducted some conference he had mentioned for an population like india only 2% bof the population are into capital market because of unscrupulous stock broker and controlling authrority where justice denied to individual investor as an international media and channel we are now plannig to bring this episode from our platform and we have also decided that the all the stock broking firms Compliance team never applies the law in favour of the client they are stoong of company and now we have decided that legal team of sebi and nse bse and other stock broking firms main duty is break the law and we are planning to bring it to the motice of Supreme court to derecogonise most the legal officals of stock broking firms and those related to stock markets including the IGRC team lawyers who never apply their mind would our surmise we need moneylife support

    Nilesh KAMERKAR

    7 years ago

    Janaza uth raha tha, phir bhi taqleef thi unko aane mein . . .

    Will the IEPFA make any difference to investors?

    One only hopes that the Investor Education & Protection Fund Authority
    will be investor-friendly and not end up as one more sinecure for retired babus


    The Companies Act, 2013 (the Act) envisages several investor protection measures; one of them is the constitution of ‘Investor Education and Protection Fund’ (the Fund) as well as setting up of an independent authority to administer...

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  • Restarting investments after a major expense or cash outgo

    Major expenses are mostly pre-planned. If they are unplanned, they may cause a deeper hole in our pocket that may be difficult to stitch quickly unless you follow simple and basic principles of investing throughout

    A major expense may not only set us back financially but also psychologically. We may feel akin to having swum onshore aboard a sinking ship. There is cheer that a major task may have been accomplished but there is also despair that we may not know how to recoup our financial energy quickly.
     

    Major expenses are mostly pre-planned. If they are unplanned, they may cause a greater hole in our pocket that may be difficult to stitch quickly.
     

    I recently met a well educated (IIM graduate) professional, who had just been through a major medical expense (for his father). He asked me for help in reconstructing his financial future.
     

    I tried my bit in enlightening him to start his investments engine with simple and basic principles. Strangely enough, he was unaware of the majority of following principles:

    • A new beginning: Start saving. We must start spending less than what we earn. Taking leverage to keep ourselves afloat after a major expense can prove to be like getting stuck in a spiraling storm.
       
    • Active Management: Put our savings to good use. Letting our savings lying idle in the form of money in savings or current account or even as cash at home will cause our recovery to be a long drawn one. Let me illustrate with an example – even if you save Rs10,000 per month and put it in a liquid fund (the least volatile and most liquid type of mutual fund product) vis-à-vis savings account or current account, you end up earning a minimum of Rs4,000 more per annum (over the last 10 years, liquid funds have given average returns of 7-11% per annum vis-à-vis 0% and 4% in current and savings accounts, respectively)
       
    • Diversification of investments: Invest across investment classes like fixed income, equity, gold, real estate. Due to global and local economic factors like uncertainty, inflation, currency fluctuations, we must look at all possibilities that fall within our risk-return parameters. Consideration of future requirements and time horizon often drives the asset allocation pattern.
       
    • Post tax returns: Taxation brackets can influence significantly since there are arbitrage opportunities available for capital market products like mutual funds, equities and tax-saving schemes/instruments.
       
    • Monitoring: When we end up monitoring even the smallest expense, then we must allocate time to monitor our hard-earned money invested. Just one hour per week is sufficient to ensure that we have a complete hold on our investments.
       
    • Cut out emotions: Emotion is the cause of our investments going awry. We tend to get stuck with our investments because we keep justifying existence of these unproductive investments in our portfolio. Exiting these investments becomes difficult since these erroneous investments tend to make us feel guilty. Even if the decision has been made by us on the recommendation of someone known to us, we must evaluate objectively and exit (even with losses) as soon as we get an opportunity.
       
    • Re-balancing: Investments are like diet. They need to be re-balanced for getting proper outcomes. Just as a dietary imbalance can cause a health scare, an investment portfolio imbalance can cause a wealth scare. Going excessively on an asset class that we tend to prefer may not be an appropriate strategy for financial planning. Most of us Indians have a fetish for physical assets like Gold and Real-Estate and hence, we tend to get over-board on them. This can prove to be counter-productive in high-growth phases in economy. As seen between the years 2003-2007, equity investments far out-performed Gold and also they are far more liquid than gold.
       
    • Get an advisor: Last but not the least, one should get a skilled and honest investment advisor and stick with that advisor for a long period of time. He/ she will ensure that most of the above is followed and followed rigorously.

     

    (Akshay Gupta is managing director and chief executive of Peerless MF)

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