SEBI’s latest consultation paper has put Registered Investment Advisers (RIAs) engaged in providing execution services in a fix. So far, a majority of RIAs offer both advisory and execution services. SEBI’s proposal to choose either of the two is making RIAs rethink their business models. Some advisers even say that many RIAs will be forced to go back to distribution, which is comparatively more lucrative than charging fee if the consultation paper becomes a reality. Existing RIAs and distributors have been given time till March 2019 to choose to offer either advisory or distribution.
“Many RIAs have not been able to build a practice which can be sustained only on fees. So they will rethink whether they wish to continue as RIAs. I guess some RIAs will choose to become distributors. That said, I believe we will see more RIAs entering the profession as there is now clarity on the regulations,” believes Suresh Sadagopan of Ladder7 Financial Advisories, a SEBI-registered RIA.
SEBI RIAs who are offering both advice and distribution are planning to surrender their licenses if SEBI goes ahead with its proposals. “I guess a majority of the first tranche of RIAs whose licenses are due for renewal would not renew it. Even I would surrender my license if our suggestions are not considered by SEBI,” says a Mumbai based RIA requesting anonymity.
Advisers say that Indian market is still nascent, and it is very difficult to charge fee. “SEBI should allow RIAs to offer both services. If not, it would be an inconvenience for clients. Both distribution and advisory are well regulated. Big distributors are audited by SEBI and have to follow AMFI Code of Ethics. Moreover, there is no way to prove mis-selling which is very subjective. For instance, you can see that only funds which do well receive inflows. Even bigger fund houses which performed badly have lost assets. This shows that distributors act in client interest. I think SEBI should be more practical in its approach and consult experienced advisers and distributors while formulating regulations,” adds the above quoted RIA.
If the proposals were to be implemented in its current form, those who wish to continue as RIAs will have to move their client assets in direct plans. Many RIAs have started moving in this direction. But some teething troubles like accessibility of direct feeds remain.
The most contentious proposal is to bar RIAs from offering distribution services through any immediate relatives. Immediate relative means a spouse of a person, and includes parent, brother, sister or child of such person or of the spouse as defined under SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011.
Advisers registered with SEBI say that the regulator can’t force this rule on them. If this proposal becomes regulation, it is very likely that RIAs would challenge it in court. “The rule to prohibit relatives/any legal entity not to engage in either advisory or distribution just because another legal entity is already engaged in one of the said activity is not correct and will not hold ground in the eyes of the law. SEBI can't stop a brother from advising if his/her other brother is in distribution. To give an example, I don't think SEBI can prohibit Mukesh Ambani to get into advisory just because Anil Ambani has taken up distribution. Or for that matter, how can you legally stop a deserving qualified CFP spouse to pursue advisory just because his/her spouse is into distribution. It's about taking away the right of any individual in a free country. The same applies to corporates. I don't think SEBI can/should stop Nita Ambani to pursue advisory in her individual capacity, just because her husband Mukesh Ambani runs distribution in Reliance Industries Ltd,” wrote Brijesh Dalmia of Dalmia Advisory Services in his feedback to SEBI.
Brijesh also sought clarity on the definition and interpretation of the term 'appropriateness' for distributors. SEBI has said that Mutual Fund Distributors (MFDs) can explain the features of products to client, and shall ensure the principle of ‘appropriateness’ of products to the client.
“Can a distributor write email to client suggesting which schemes he should invest in? Can a distributor suggest a client to sell/switch an investment on the grounds on appropriateness? Can a distributor do risk profiling? A distributor should not be found guilty just because he/she interpreted it in a different way,” asks Brijesh.
Meanwhile, some distributors are relieved that they are at least not being forced to become RIAs, though they may be barred from offering advice. Advisers say that banks and national distributors would also opt to become distributors rather than RIAs.
Advisers who operate on fee-only model (few and far between) are the ones who are unaffected by SEBI’s latest proposal. “SEBI has been trying to introduce a fiduciary responsibility for intermediaries. It is clearly trying to remove the conflict of interest. For mutual fund distributors, trying to determine the appropriateness of products for clients itself is advice. So SEBI should try to plug these loopholes by clearly defining what is appropriateness," says Kunal Bajaj, CEO and Co-Founder, Clearfunds. Clearfunds is a robo advisory platform registered with SEBI as RIA which offers direct plans.