Any regulation is made with an intent to make the system better. It could have some adverse effect on existing players. Usually they are given time and/or support to adapt to the changes.
Regulations can also spur newer players with different business models to enter the space. If these people add value to investors, this is a very positive outcome from the regulations. The RIA regulations definitely enabled individual, fee-only advisers to provide a valuable service to the end users - investors in this case. A few dozens of such advisers have provided valuable service to investors.
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Let’s look at some specific issues in SEBI’s consultation paper and the impact:
1. Section 3.5.1.9 mandates both the experience and educational qualifications. The current regulations require either of them. The minimum experience is set as 5 years. Existing advisers are given 3 years to comply with the requirements. Any lateral entrant from the second half of 2018 would be very adversely affected by this new guideline. There is no rationale provided on why both experience and education requirements are necessary.
Also, in future, this would completely shut out people from outside the financial services industry.
2. Section 3.5.2 imposes new net worth requirements for Investment Advisers. There is no specific rationale provided for the higher net worth requirement.
3. Section 3.5.2.6 imposes an arbitrary upper limit on the number of clients and individual or partnership firm can handle. There is no rationale provided for this. There has not been any analysis done to see if such limits are even needed. In the absence of these, it is difficult to attribute any charitable motive for the new restriction. This section can be seen as favouring body corporates at the expense of individual and partnership firms.
4. Section 3.7.3 removes the usage of Continuing Professional Experience (CPE) credits. CPE is a global practice followed in many fields. There is no reason to remove it and required periodic 're-certifications'.
5. Section 3.4.5 uses specific language to refer to 'advance fees'. The language seems disconnected with the reality of fee-only advisory. In this model, a vast majority, even up to 90%, of the effort is spent upfront by the adviser. The language in the section seems to assume that the effort is spread over a year. This could be the case for distribution services, wealth management services, etc. But it is strange to apply this language to Investment Advisory as defined by SEBI.
6. Section 3.4.2 clearly gives the context on the issue of fees. There have been instances where IAs have charged fees that are clearly exorbitant. A regulator then would have to use 'hard hands' and come up with caps on fees, and Section 3.4.4 does that. The section could be more flexible for the fixed fee model and provide periodic revision of fee caps.
7. Section 3.3 is a welcome move. It provides a list of 'standardised terms and conditions' for IA services. Adherence to the new guideline would greatly reduce the friction in the adviser-client relationship.
8. Section 3.1 takes a nuanced stand on the separation of advisory and distribution services. It is a departure from the previous consultation papers where the regulator favoured a clear separation of these services. The discussion in this section does not say why this change was felt necessary. The dilution of the stand on this important issue is clearly favourable to established entities who have both distribution and advisory practices.
Comments 1,2,3 and 8, taken together, can be seen as a clear tilt by the regulations in favour of established, multi-business entities and against committed, individual, new fee-only planners.
Regulations get amended from time to time, and this is usually a welcome move. The amendments have to be fair to all stakeholders, including new entrants who have abided by the letter and spirit of the regulations. Amendments that overtly or covertly favour earlier business models, and punish newer entrants, would often have the undesirable effect of making the regulation ineffective. The guidelines under public review clearly fall in this category. They clearly make it unviable for individual, professional, fee-only planners to enter and succeed in this space. Please refer to this website for a clear articulation of such planners.
