Securities and Exchange Board of India, or SEBI, has come up with amendments to the Investment Adviser (IA) Regulations, which have brought in changes like client level segregation. This allows individuals along with their family unit to do both distribution and advisory activity for different set of clients. This is also permitted for corporates too, at the group level.
This offers a level of parity between individual and corporate entities to conduct both distribution/ advisory business, though for different set of clients.
Qualification
There were other changes in the IA amendment gazette notification that changed the landscape for IAs. For one, the qualification criteria have gone up to professional courses/ PG course for both IAs and their representatives. The experience criteria are five years for IAs and two years for their representatives. Both will have to have an appropriate NISM accredited certification like CFP certification. But the twist is that such certifications cannot be renewed through CPD points. A refresher capsule covering the new developments with a quiz will most probably be the solution to this issue, much like what happens while renewing one’s AMFI Registration Number, or ARN.
Recruitment of representatives [Persons associated with Advice (PAA)] with the necessary qualifications, experience and certification is going to get difficult and costly due to non-availability of such compliant candidates.
Client limit for individual IAs
There is also a clause for compulsory corporatisation when an individual IA touches 150 clients. The non-individual category now requires a net worth of Rs 50 lakh, which is going to prove challenging for many individual IAs, who cross the threshold. Such individual IAs may want to align with platforms or may want to keep the number of clients below 150.
There were a couple of areas that were left undefined in the gazette notification. That has now come in the form of a circular.
Fee
Two major areas which have been addressed are regarding charging of fee and the agreement between the IA and the client.
The major assumption that has been made is that all engagements are ongoing. Fee can be charged on a fixed or AUA basis. Only one mode can be used per year and if necessary, can be changed after a year. An advance amounting up to six months of fees can be collected from clients.
Fixed fee is capped at Rs 1.25 lakh per annum across all services offered by the IA. Capping the fee at an absolute number is troubling, as the real value of fee that can be charged diminishes over time.
The AUA based fee is capped at 2.5% of the assets, for which proper underlying proof in the form of supporting documents like demat statements, unit statements etc. needs to be shown.
This proposed fee structure is troubling at a fundamental level. On the ground, there are many engagements that are of a short-term nature. For instance, financial planning can be such one-time engagement that an IA may have with their client. But, under the current model, the IA has the ability to collect only 50% of the fee in advance and the balance after six months.
But another way of looking at it would be that the financial planning engagement is the main service for the client in the year. Hence, when that gets done in a quarter, an appropriate fee for that is collected. If there are any other services, like financial consultations being offered, that can be charged across the year.
The services and the efforts can hence vary across the year. If the fixed fee collected reflects this, within the overall cap suggested, then this model can accommodate one-time situations as well. The fee that an IA charges should be a factor of their effort and hence, this should be permissible.
Client agreement
There are many changes suggested in the service agreement between the IA and the client. For starters, some important information is to be mentioned upfront on the first page itself to ensure that they are not lost in the verbiage of typical service agreements. This is a move to bring in more transparency and help the client to understand at least the salient points before they sign up.
There are many points that are now to be included in the client agreement like scope of services, validity, risk factors, investment objectives and guidelines, conflict of interest, maintenance of accounts and confidentiality, no right to seek power of attorney etc.
Many of the clauses mentioned are good for clients and even better for IAs as it will ensure clarity, minimise conflicts and differences later. The service agreement is now mandatory. Many IAs have been using one for long. Now that will become far more robust and useful.
There are other things that also find a mention in the circular like maintenance of records. Records need to be maintained for all interactions between the IA and clients or even prospective clients where there is some advice involved. Audit needs to be completed within six months from the end of the financial year and any adverse findings as well as action taken need to be reported to SEBI before October 31 of the next FY.
With the new amendments to the regulations and the current circular, it does appear that they have done a comprehensive refresh. It is a relief in a sense to all IAs as they can realign their practices now without the regulatory uncertainty that was there all this while.
Suresh Sadagopan is SEBI Registered Investment Adviser & Founder of Ladder7 Financial Advisories.
