In your interest.
Online Personal Finance Magazine
No beating about the bush.
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.)
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...
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:
(Akshay Gupta is managing director and chief executive of Peerless MF)