Securities and Exchange Board of India (SEBI) has come out with a fourth consultation paper which has proposed that individual Investment Advisers can offer both advisory and execution services provided they have client level segregation. This means that they cannot offer both distribution and advisory service to the same client at the family level (spouse, dependent children and dependent parents).
Individual IAs offering advisory services can help clients implement the plan (provide execution service) under their RIA code in direct plans. However, they cannot charge any implementation fee (embedded/indirect or referral) fee for such implementation services. Clients still have the choice of implementing the plan from any other entity.
Further, SEBI has proposed that the erstwhile requirement of Continuing Professional Education Programme (CPE) for renewing Investment Adviser License to be done away with. Instead, Investment Advisers can obtain a fresh certification before the expiry of license.
The net worth requirement for individual IAs has been increased from Rs 1 lakh to Rs 10 lakh. For non-individual RIAs, the net worth has been increased from Rs 25 lakh to Rs 50 lakh. SEBI has given a timeframe of three years for existing IAs to comply with the net worth requirement. Further, existing IAs whose number of clients exceed 150 or whose assets under advice exceed Rs 40 crore need to re-register themselves as non-individual IAs within six months of the trigger event.
To strengthen the grievance handling mechanism, SEBI has proposed that IAs have to maintain records of client interaction (existing and prospective) in the form of email/SMS/physical record signed by client or telephone recording for a period of five years.
To curb instances of charging unreasonable fee by IAs to clients, SEBI has proposed to cap the fee at 2.5% of AUA or Rs 75,000 annually per family across all products and services. The fee can be collected advance for a maximum of two quarters.
SEBI has also sought to enhance the qualification criteria for individual investment advisers. Individual RIAs will need to have minimum qualification of Post Graduate (minimum 2 years) in finance, accountancy, business management, economics, capital market, banking, insurance, or actuarial science from an institution recognised by central, state or recognised foreign university. In addition to this, they need to have an experience of at least five years in securities market/wealth management and an Investment Adviser certification offered by NISM or CFA or CFP or any NISM accredited certification offered by stock exchanges.
Here’s what Investment Advisers have to say about SEBI’s proposals:
"The proposed a cap of Rs 75,000 on fixed fee mode of advisory needs a rethink. Many clients get attracted to the non-AUM linked fixed fee (and don’t want to engage in paying fee as % AUA). But it may not be viable to service very large clients with this capping on fixed fee. And the proposals don’t address how and when this upper limit of 75K will be revised (due to inflationary needs). So I don’t see the fixed-fee cap being implemented in its current form. The main idea behind fee capping seems to be to discourage (and stop) the large fee charged by unscrupulous stock tippers and fake advisors. And the regulator’s intent is right. But it’s not fair to paint all RIAs with the same brush and put cap on the fee of real advisors who provide genuinely good, comprehensive advice. If SEBI wants to regulate stock tippers more tightly, then they should consider creating a separate direct-stock-advisory-IA model and regulate it accordingly. No doubt SEBI has been trying to improve the RIA framework with new proposals (rules) every year. But such periodic flip-flops on the regulatory front doesn’t allow the business models to stabilize. And if the new proposals become rules, then it will be difficult for smaller RIAs to prosper and have a viable business under the RIA framework." - Dev Ashish, Founder, StableInvestor.
"Insisting on Post Graduate qualifications is not a good step in a country like India where we need lakhs of IAs to service crores of people. Insisting on corporate set up beyond 150 clients also goes against small IAs. SEBI has also sought to cap the fee. I feel it should be left to market forces. Allowing individual IAs to distribute products is going back on the part of earlier stand by SEBI. Allowing IAs to offer distribution is against the spirit of IA Regulations. It should have been avoided. It appears that the new IA proposals will benefit few corporate IAs and will act as entry barrier for new individual IAs to come into this field." - Melvin Joseph, Founder, Finvin Financial Planners.
"The proposal to register as non-individual IA for those managing above Rs 40 crore AUA or 150 clients is arbitrary. What is the possible rationale for registering as non-individual entity when we are not? I understand SEBI wants reasonable net worth requirement as we are fiduciaries but insisting professionals to choose a particular entity (with high registration fee) is neither helping investor nor the adviser. The profession is at a very nascent stage and a regulation like this will discourage new entrants and make it a turf for large corporate entities with deep pockets." – Kavitha Menon, Mumbai-based RIA.
"The cap of Rs 40 crore of assets under advisory or 150 clients for individual RIAs will ensure that financial planners working on affordable fixed fee-only model cannot have sufficient clients and revenue to be viable and hence will have to exit the profession. Forcing re-registration as non-individual and the minimum net worth requirement of Rs 50 lakh for RIAs having over 150 clients or AUA exceeding Rs 40 crore would create an entry barrier for small RIAs. This will force clients to engage with bigger and established RIAs who charge very high fees. Further, insisting on particular Post Graduation even for those who have 5+ years of relevant experience (and vice versa) will ensure that even more individual RIAs have to exit the profession.” - Swapnil Kendhe, Founder, Vivektaru.
SEBI has sought feedback on the proposals by January 30 at sebiria@sebi.gov.in. The consultation paper can be accessed here.