Market regulator Sebi had created a new category of Investment Advisers (IA) vide its IA Regulations, 2013. IAs were to act as a fiduciary to the client and earn from fees paid by them. There were many stipulations on education, experience, certification, compliance, disclosures, etc., which the IAs have had to comply with. Ten years on, the IA community has shrunk to just 926 members (as per the numbers registered with BSEASL as of early July), down from over 1,300. This does not augur well for the industry when the intention was to make available high quality, client-centric advice to investors at large. Thus, a relook at the 2013 regulation is necessary.
The IA regulation states that the investment adviser is a person who is in the business of providing advice for a consideration. This could mean that those who offer advice and not charge a fee are not investment advisers and need not come under this regulation. This is problematic. The intent is to protect investors’ interest and give them access to high quality advice. Yet, anyone can give advice without charging a fee. They can then get compensated through other means such as commissions or brokerages on sale of products like insurance, mutual fund schemes, fixed deposits, non-convertible debentures, etc. This was the situation that existed even before the IA regulation came in!
Any advice has good and bad consequences and hence the person giving advice should be held accountable even if they don’t charge a fee. If such a person does not come under the IA regulation, they can mislead investors and get away with it.
As per IA Regulation, investment advice is defined as advice relating to securities for clients, which includes financial planning. Note that financial planning is mentioned at the end, almost as an after-thought. It should have been the other way round.
The focus seems to be on advice relating to securities culminating in investment. The regulation is emphasizing the transactional aspect of choosing products as advice delivery over the holistic and comprehensive client-centric work that financial advisors offer which culminates in investment advice.
Despite the IA regulation, many entities assess individual client situations and create a financial plan and offer holistic financial advice. There are also stock tip providers whose stock calls are merely based on their estimate of stock performance in the future and are returns-oriented. This is speculative investment at best. There are thousands of complaints against such entities in the past, many of whom have indulged in questionable practices. To tackle this, the IA regulation has been tightened. However, this move has only affected genuine IAs who are true, client-centric financial advisers. And it is made their practice very difficult and unviable.
The regulator should ensure that no other entity offers advice without becoming an IA. However, the reality is that for every IA, there are tens of unregistered entities who are brazenly offering financial planning and advisory services, without complying with any of the requirements needed under the regulation. A cursory internet search will throw up hundreds of them. Then, there are finfluencers who offer advice under the garb of providing financial education.
Till now, Sebi has not done anything consequential and has maintained that these people are not registered with them and hence beyond its jurisdiction. However, that compromises the interests of the legitimate and compliant RIAs, infringes on their territory and causes confusion among investors. If the intent is to ensure that the IAs have the means to compensate a client in the event of a dispute, an insistence on a professional indemnity insurance taken for a reasonable amount should do. There is no need for non-individuals to maintain ₹50 lakh at their firms. This is proving to be extremely onerous for most as they are transitioning from an individual entity to a firm on reaching 150 clients.
There are many more rules that need a relook, such as the need to write the same certification exam every three years, strictures about the fee, etc. If that is not done soon, IAs will end up as micro niche players, accessible to just a few and not ever reaching the intended potential for providing fiduciary, fee-only advice for the investing public at large.
Suresh Sadagopan is MD & principal officer, Ladder7 Wealth Planners P. Ltd, and author of If God was your Financial Planner.
Updated: 10 Jul 2023, 10:14 PM IST