Can regulations for investment advisors make you safe?

Today in the world of financial exuberance and with the market being flooded with host of investment products, what many investors want is, to be in safe hands and a prudent advice to put personal finances in place. Some players in the financial services industry while offering third party investment products, have unfortunately resorted to the practice of pushing products rather than "advising" (taking into account their client needs and risk profiling) them, which has led to several cases of mis-selling and investors feeling betrayed. In case of mutual funds too, with a plethora of mutual fund schemes to invest in, many investors haven't been advised schemes appropriately (taking into account their investment objective, risk profile and investment horizon) infusing in them a feeling being duped, while many distributors have made hay - earned good commissions. The immoral act carried by many distributors has impacted the trustworthiness of mutual fund houses. So have India’s mutual funds failed you? Cast your vote now and help make a change.

But now to correct this anomaly and crack the whip, the capital market regulator- Securities and Exchange Board of India (SEBI) has recently (on January 21, 2013) issued the much awaited regulations for investment advisors (vide a notification in the Gazette of India).

The Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 has enunciated requirements related to obtaining a certificate of registration, qualification, capital adequacy, period of validity of the certificate, and has also mentioned other general obligations and responsibilities on the part of investment advisors.

• Obtaining a certificate of registration - It has been made mandatory for those engaged as investment advisors to obtain a certificate of registration from SEBI. For those who are already acting as investment advisors immediately before the commencement of these regulations can continue for a period of six months from commencement of these regulations; or if they have applied for a certificate within the said period of six months, then until disposal of such an application.
• Qualification - Moreover while granting the certificate of registration, it has been made mandatory for an investment advisor to have minimum qualifications at all times which can be:

a. A professional qualification or a post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognised by the central government or any state government or a recognised foreign university or institution or association; or

b. At least a graduate degree in any discipline with an experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management.

Besides the aforesaid, the regulator has also made it mandatory for the investment advisor to have a certification on financial planning / funds / assets / portfolio management / investment advisory services either from the National Institute of Securities Markets (NISM) or from any other organization or institution including Financial Planning Standards Board India or any recognized stock exchange in India provided that such certification is accredited by NISM. It is noteworthy that certifications will be required to be complied not only by the investment advisor himself, but also by the partners of an investment advisor and / or representative of an investment advisor, within two years from the date of commencement of such regulations and the certification would be required to be renewed before the expiry to ensure continuity in compliance.

• Capital adequacy - The capital market regulator has also made it compulsory for those who want to venture into the business of investment advisory to have a minimum net worth; wherein for body corporates it (the net worth) shall not be less than Rs 25 lakh, while for partnership firms and individual investment advisors, they shall have net tangible assets of not less than Rs 1 lakh. For those who are already into the investment advisory business, they will be required to comply with the capital adequacy norms within one year from the date of commencement of these regulations.
• Validity of the registration certificate - The certificate of registration granted by SEBI after having complied with the necessary regulations hereto, shall be valid for a period of five years from the date of its issue. In case of renewals, the investment advisor so if he desires can make an application once again three months before the expiry of the validity period (i.e. five years).
• General obligations and responsibilities - Intended to provide better advice to investors, the capital market regulator has also enunciated general obligations and responsibilities on the part of investment advisors. These are:

√  Disclose conflict of interest as and when they arise.
√  Disclose all material information about itself including its business, disciplinary history, the terms and conditions on which it offers advisory services, affiliations with other intermediaries and such other information as is necessary to take an informed decision on whether or not to avail its services.
√  Disclose to its client any consideration by way of remuneration or compensation or in any other form whatsoever, received or receivable by it or any of its associates or subsidiaries for any distribution or execution services in respect of the products or securities for which the investment advice is provided to the client.
√  Confidential information about the client shall not be divulged, without taking prior permission of the clients (except where such disclosures are required to be made in compliance with any law for the time being in force).
√  He (investment advisor) shall not act on his account, knowingly to sell securities or investment products or to purchase securities or investment product from a client.
√  Undertake proper risk profiling of the client by obtaining the requisite information such as (age, income, existing investments / assets, liabilities / borrowing, investment objective, and investment horizon amongst others). In the process of risk profiling, he (an investment advisor) should also assess the investors capacity to absorb a loss, identify whether an investor is unwilling or unable to accept the risk of loss of capital and appropriately interpret client's responses to the questions, rather than attributing inappropriate weight to certain answers. Moreover, the risk profiling needs to be communicated to the investor after the assessment is done and needs to be update periodically.
√  The investment advice needs should be provided on the basis of risk profile of the investor and there needs to be documented process for selecting investments based on client's investment objectives and financial situation.
√  Maintain the following records (either in physical or electronic form) and shall be subject to a yearly audit from a Chartered Accountant or a Company Secretary.

• Know Your Client records of the client
• Risk profiling and risk assessment of the client
• Suitability assessment of the advice being provided
• Investment advice provided, whether written or oral
• Rationale for arriving at investment advice, duly signed and dated
• Copies of agreements with clients
• A register or record containing list of the clients, the date of advice, nature of the advice, the products/securities in which advice was rendered and fee, if any, charged for such advice
• It is noteworthy that all records will be required to be maintained and preserved (either in physical or electronic form) at least for a period of five years.

We are of the view that, with such a regulation coming into force (from the ninetieth day from the date of their publication in the Official Gazette) now investors would finally be in safe hands, dealing with registered investment advisors and can expect improvement in the quality of advice due to they being made more accountable and responsible by the capital market regulator, since they have to abide by a certain code of conduct. Such a regulation in our view could protect investors, and could safeguard them in case if legal battle erupts with their investment advisor. We also believe such a step would help exude confidence in the minds of investors and make the investment advisory business in India more regulated and responsible.

Having said that, it is imperative for you as investors to be responsible and do your homework before placing blind-fold faith on investment advisors.

PersonalFNis a Mumbai based Financial Planning and Mutual Fund Research Firm