August 23

IA Regulation – consolidating the gains

It was a momentous decision by SEBI to bring in the Investment Adviser Regulation in Jan 2013. This regulation was to bring in a new class of fee-only advisers, who will march to a different drumbeat.

They will be governed by much higher standards of Education, Experience & Certification. Also the documentation, processes, compliance & reporting were to be at a much higher level as compared to, the then existing standard.  They were to avoid conflicts of interest & maintain arms-length distance between advisory & distribution ( if any ).  They also had to be audited for processes & compliance on an annual basis. The final cherry on the cake was that they assume Fiduciary responsibility. Fiduciary responsibility means that they put the client’s interest above everything else, even above their own interests.

All these look game changing & it is. This was the way to go in helping Indian customers to a financially secure future. Indian public would now have someone whom they could consult for accessing unbiased advice.  When this regulation came in, there was consternation that Indian consumers were not ready to pay a fee, unlike in other parts of the world. When I had interacted with American planners years ago, they confirmed that Americans are equally chary when it comes to paying a fee! Globally consumers are more accepting of indirect, built-in charges rather than paying a direct fee!  However, there are fee-only planners in US who charge on engagement/ project basis, hourly basis in the form of lumpsum fees or percentage of Assets under Advice ( AUA ) – and their tribe is growing.  In India too, RIAs have been able to charge a fee, though for most of them, the fee incomes are still to become significant.

RIAs have a long way to go from here & the advisory practice would evolve over time and become mainstream.  There were challenges for RIAs for sure – they had to segregate their businesses & establish arms-length dealings, become prepared for higher level of compliance, maintenance of records & reporting, strengthen processes  & finally convince clients to part with a fee for advice!

While these itself is more than a handful, there have been other challenges that RIAs had to contend with. One of them is a lack of awareness on the consumer side about the concept of RIAs.  Many of them also do not know about Certified Financial Planner  ( CFP ) designation as well and what’s worse, confuse that with CA, CFA & other designations!  The members of the public are also not aware of financial planning. A recent survey put the awareness among the public on financial planning at 0.04%!  And those who know have wrong notions about  financial planning!

There is another major challenge that RIAs face… competition from non-registered advisors.  Since consumer awareness on RIAs is low, there are multitudes running into hundreds who have not registered as RIAs, but are brazenly offering advisory services, with impunity.  Such people are openly plying their trade with their websites freely soliciting clients for financial advice.  However, the practice continues to this date as the regulator has not restrained such people from practising without registering.

But, the existence of such people who are flouting the IA regulations is creating two problems – 1) Unregistered entities are posing as advisors & try to sell products diluting the advisory proposition, giving advisory itself a bad name  2) There are others offering advice without registering and taking away clients, as also lowering the fees for genuine advisors.  In both cases it is a question of unfair competition & lack of a level playing field 3) The public who are not informed about these things are being taken for a ride by those who don’t follow the law in letter & spirit.

Direct Plans  – Direct plans have been there in the past, but were cumbersome for the clients as they had to do the investments themselves, will get no advice & no proper reporting mechanism.  That changed in the beginning of the year when MF Utility enabled Direct plan transactions. Also, SEBI brought in a customer friendly move where the Direct Plan feeds of clients who are accessing advice from RIAs, can be shared with those RIAs, who will offer advice on them.

However, the joy was short lived. Even after seven months after the diktat, RIA code field  is not featuring  in any application form/ transaction forms of AMCs.  AMCs allow customers to transact in Direct Plans on their websites. But, there too, the RIA code is not captured in case that customer has one to advise them. This has resulted in RIA data itself not being captured anywhere & hence the R&T is unable to send any feeds to RIAs pertaining to their clients.  This has resulted in untold misery for RIAs who are running in circles, with no solution in sight.

MF Utility is capturing RIA codes but still has not been able to transmit that information to R&Ts ( as we understand that there is some disagreement on the way the data is to be sent ). So, those doing through MFU ( like us ) are still not able to get any data, even though the RIA code is mapped to every investment!

This has put the RIA community in a bind. We all know that Direct plans are best from a client point of view.  This eliminates the conflict of interest completely. As Fiduciaries, it is best for RIAs to advice on Direct plans/ ETFs and other low cost products, in client’s best interest.  But, due to various problems mentioned above Direct plans have been a non-starter for RIAs.

SEBI has been championing the cause of Investors & rightly so.  RIAs have shown tremendous courage to embrace what is admittedly a tough regulation & are willing to go the whole hog with Direct plans – which is exactly in line with the fee-only advisory SEBI is pushing for. SEBI should smoothen the way forward for RIAs in respect of Direct plans and help eliminate the unnecessary pain points by directing the constituents to fall in line.

What SEBI can do –  SEBI should also get involved in promoting financial planning & in percolating awareness regarding RIAs. One of the things that is left out of the IA Regulation is for RIAs to offer advice & distributors to implement. This is exactly like the Doctor – chemist model, where the chemist cannot dispense medicines without a prescription. This model would ensure wholesome advice to clients, without any conflict of interest.

The second is to ensure that those who are not registered do not pose as advisors. This does a lot of damage for the consumers at large & to RIAs and also dilutes the sanctity of the regulation in the eyes of the public.

The third is to necessarily have separate entities for advisory & distribution and not allow any data sharing between them ( unless they take explicit permission of the client ). In many cases, the arms length & chinese walls are very porous for comfort!

Lastly, SEBI could show courage to eliminate commissions across the board like it has happened in UK & everyone lives by charging a fee. While there are many who have anecdotal evidence & extraneous studies to prove that it is not working, this is in the interest of customers. Unlike the claim that small customers will be marginalized, new models will emerge to service them with minimal intervention. One such model is already there – Robo advisors!

It’s three and half years since the regulation was introduced. It’s time for a refresh.


SEBI RIA regulations

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  1. Dear Suresh Sadagopan,

    I agree with your points. And would to like to add few points such as Registration with is exempted for few categories like MF advisor, Insurance advisors (as long as they are doing only one thing).

    With these exemptions in place, is it possible to divide the advisors as Registered advisors and Non Registered Advisors. And is to good to blame the Non Registered Advisors.?

    Many Non Registered Advisors are ready to register with SEBI, but fees are exorbitant.
    I have tried to express the options for Non Registered Advisors. Not to hurt to the Registered Advisors.

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