February 11

Investor Adviser Regulation – is it really good for consumers


More regulations protecting investors are good, right? Wrong. Too much regulation will actually scare away players from the turf and make operating in the marketplace expensive & onerous at the same time. This regulation is anachronistic, when we realize that the common man needs more choices to get dispassionate advice. Now the choices will narrow, considering the fact that there will be fewer investment advisers, offering advice.

If the attempt is to protect the investors, then the regulation should cover most intermediaries operating in this space. However, a whole legion of intermediaries & other extraneous persons have been exempted from the regulation. Consider all those people who are exempted – Insurance agents, Pension agents, MF Distributors, Chartered Accounts/ Company Secretaries who offer advice incidental to their practice, lawyers who offer advice incidental to their practice, Stock brokers, Fund managers of Mutual funds, Alternative investment fund etc.  So, there are a whole lot of them who are exempted. All these people are going to approach the consumers and go about their business as they have always done.  Where is consumer protection then?

Consumers would continue to be serenaded by “Investment Products” from Insurance companies, Stock brokers would continue to offer “tips” to investors at convenient intervals to get them to churn, MF advisors will go about their business as of yore… And Investment Advisors are the only set of people who will follow the regulations, which are pretty stiff.

Those desirous of becoming Investment Advisors will have to fulfill various criteria. Education-wise they should be government recognized post-graduate degree/ diploma holders in finance related fields  or graduates with five years of experience in advice in financial services area. Now, this is a fairly high bar that they are seeking to set, which is good for the future. But, this is going to preclude a whole cadre of advisors from qualifying under Investment Adviser regulation, as they do not fulfill this education criteria.

Those who had wanted to become Financial Planners or true-advisors, were erstwhile distributors of financial products, who have completed a certification in Financial Planning and were on their way to transforming themselves into fee-charging advisors. Now, many of them won’t even qualify, due to the education criteria. Also, there are many new candidates who are pursuing CFP certification, in the hope that they can start practicing as planners.  Now those dreams would remain dreams, unless they are post-graduates. Many are not and many do not have five years experience, in financial services advisory after graduation, as required. So, these candidates would now have to embark on some post-graduate diploma/ degree in financial area to be able to meet the qualifying criteria for Investment Advisers!   The regulation will come into force in three months and there is another six months for those who have been acting as Investment Adviser before these regulations, to comply. When there is a crying need for more advisers, the regulation is trying to exclude as many as possible. Had the adviser regulation been graded in it’s approach, this problem could have been avoided.

There are other areas which can be problematic. Fortunately, the networth criteria for individuals seeking registration, has been kept at Rs.1 Lakh. For Body corporates, it is Rs.25 Lakhs. For corporates, the regulation allows them to operate the investment arms and the advisory arms, through separately identifiable departments. This according to the regulators, would avoid conflict of interest!  However, individual advisors can either offer advisory services and charge a fee or be a distributor of products. This clearly is an uneven field, where nothing changes for the corporates but individual agents would have to make up their mind about being a distributor or an Investment Advisor. This regulation has a clear pro-corporate slant.


We come to the nub of the problem with this regulation. There are two. One is that Investment Advisors can offer their services for a fee and cannot receive commissions or other forms of compensation. That is fine. But the ground reality is that, to make ends meet, advisors have had to depend on commission income as the fee paying culture is not really present for financial advisory and as such needs to be developed afresh.

In this milieu, an advisor has to choose between relying only on a) being an Investment Adviser and  depending on uncertain fee income  b) continuing as a distributor and getting commission incomes, which are far more dependable. Now any sensible person is going to choose to remain a distributor as the income streams are far more stable. Due to this, we would find very few who register as Investment Adviser, entirely owing to mundane considerations of income.

The second aspect is the cost of compliance which will drive individuals away from being Investment Advisers. Individuals advisers will have to pay Rs.10,000/- for registration and Body Corporates will need to pay Rs.1 Lakh as a registration fee.  There is a fee of Rs.5,000/- along with application. Those registering as Investment Advisers will also have to comply with elaborate regulations. This will push up costs of recruiting Investment Advisers for those who want to scale-up, as getting someone with five years Financial services experience or a post-graduate are both costly and every one of them also needs to get registered.

The documentation requirements are going up. There is infact a section on records which mentions what needs to be maintained – KYC, Risk profiling & assessments,  suitability assessment of advice, copies of agreement, investment advice provided etc.  Records need to be maintained for five years. Also, there is now a need to get a yearly compliance audit done by a CA or Company Secretary. Further, there is further prospect of inspection by representatives of SEBI, based on complaints or on a suomoto basis, which adds to the risk and costs of doing business. All these add lots of responsibilities while the earning ability as an Investment Adviser is at best tenuous, at present.

The regulation is well intentioned. But, in it’s current form, it merely ensures that the cadre of Investment Advisers will remain pretty small in the foreseeable future and the predominant majority would choose to operate outside the purview of this regulation. If most operate outside the purview, how are investors being protected? And who should the common investors turn to, if Investment Advisers are as hard to find as wooly mammoths?



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  1. I completely agree when Suresh says that it has pro-corporate slant. From the very first time I read these regulations, I felt that it is trying to “corporatise” the advisory profession. When they provided an easy route for Banks and other bigger players of creating a SIDD for distribution business, it became clear that “corporatise” or perish.

    Individual IFAs are clearly at a dis-advantage in this current form of regulations. They have to let go a sizable distribution income if they want to be investment adviser. Even if somebody wants to form a private limited company, it has to have a net worth of Rs25 lakhs, which many would not be able to meet.

    Hoping that SEBI would provide more clarifications in the days/weeks to come and reduce the networth requirement for Private limited companies.

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