‘Putting a cap on fee will hit viability of RIA practice’

Suresh Sadagopan of Ladder7 Financial Advisories shares his take on SEBI's new norms for RIAs.
By Guest |  19-02-20 | 

The Investment Adviser Regulations 2013 has been awaiting a revision for some time now. Securities and Exchange Board of India (SEBI) had issued four consultation papers since 2013 and now has firmed up on the overhaul of the IA regulations. This has been announced in the press release a couple of days back, where they had highlighted some major changes they are proposing.

There are four proposals that can be classified as very good proposals which strengthen investors’ best interests as well as help in development of advisory community.

The one about segregation of advisory and distribution services at the client level applies for corporates. Now they can have a client for advisory or distribution, not for both as at present. For individuals, they can only advice and not distribute – status quo prevails.

The second good proposal is allowing execution services in direct plans (non-commissionable products) for convenience of investors. This time, it is clearly spelled out clearing a lot of confusion that was prevailing before.

The third good proposal is an agreement detailing the terms and conditions of the advisory engagement. This is in the client’s best interest and would give clarity about the engagement and is a welcome proposal.

The fourth one is the prohibition of use of nomenclature like Independent Financial Adviser, Wealth Adviser or other such similar appellations by distributors of securities, which mislead clients into believing that they perform an advisory role and are independent.

There are two proposals that may be viewed as good for clients but negative for the advisory profession.  But then, if it impacts advisers adversely and threatens their viability and existence, it will impact clients as well, as advisers will not be there to service them.

The first one is the absolute fixed fee limit on fees that can be charged to a client family per annum. The recent consultation paper set an upper limit of Rs 75,000 per client family per annum. Even this can be collected for just two quarters in advance. An imposed limit and multiple conditions like this are hugely problematic as it will not work in cases involving a lot of work, are complex and time consuming.

The regulator may want to curb wrongful high fee charged by stock-tip providers against whom there are thousands of complaints. But this move will directly hit at the viability of the advisory practice itself for those involved in the profession in line with the IA regulation, in letter and spirit.

There is no profession that I know of, where there are limits and conditions set on how much can be charged and how, to a client. Lawyers, doctors, surgeons, architects, CAs, CSs, management consultants etc. do not have any fee limits imposed on them by a regulator or any other statutory body. Setting such fee limits is regulatory overreach & will kill the profession.

The second one is the enhancement proposed in the eligibility criteria for IAs in terms of net worth, education, experience etc. Going by the recent consultation paper the criteria set is very high and will act as a deterrent to those seeking to become IAs.

There is a proposal which should be there, but do not know if it features in the proposed regulation, from the Press Release. While advising clients, there are still many products which offer commissions. Some of these products are outside SEBI’s ambit. To perform the role of a fee-only fiduciary adviser, IA Regulation should allow fee-offset of such remuneration, with full disclosure.  This is an enabling provision that would help in the growth of the true advisers who are conflict-free and can act in a fiduciary capacity.

Hope the refresh of the IA Regulation is good for investors as well as for the orderly growth of the advisory profession. Let us keep our fingers crossed and hope it addresses the concerns.

Suresh Sadagopan is SEBI Registered Investment Adviser & Founder of Ladder7 Financial Advisories.

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