SEBI moves to ease the path for Registered Investment Advisors

Your asset allocation should depend on your goals and risk appetite, not taxation alone

The capital market regulator Securities and Exchange Board of India (SEBI) has proposed the easing up of restrictions and regulations governing India’s registered investment advisors (RIA). SEBI's proposals come in the wake of  numerous voices from India's tiny investment advisory community being raised over concerns of excessively high regulations for far too long.

Through a consultation paper it issued on August 6, SEBI acknowledged  that India needs more RIAs (at present only 961 as per SEBI's website) to cater to a large investor base and has made key proposals.

Lowering the gates of qualification and past experience

SEBI has proposed that as opposed to the existing requirement of a post-graduate degree, a new RIA needs to only have a graduate degree. In addition, SEBI has proposed that RIAs do not need any work experience.

This is a major concession.  At present, RIAs must have a post-graduate degree with five years of relevant work experience.  The bar is a bit lower for 'persons associated with investment advice' (the junior to mid-level customer-facing employees like relationship advisors or para-planners as they're known in the investment advisory circle); they are required to have 2 years worth of relevant experience.

If accepted, this would allow new RIAs to join the profession easily. It would also allow corporate RIAs to recruit junior level people, straight out of college, as para-planners and give them training on the job. The requirement of work experience restricted many corporate RIAs from taking on new people as they would come with high salary expectations.

SEBI consultation paper on registered Investment Advisers

"The removal of the need to have word experience is a very good proposal. it enables us to recruit freshers straight from college and then train them," says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

However another RIA, who did not wish to be named said that the removal of work experience to become a full-fledged RIA is a bit too much of a relaxation, "given the complexities of the job; some job experience would have been better."

There's more. Currently RIAs also require to have a certification of financial planning either from the National Institute of Securities Markets (NISM) or any other accredited (and related) certification such as ‘Certified Financial Planner.’

SEBI hasn’t proposed a change in this, but has suggested a significant concession here as well. It has proposed the abolition of a requirement that RIAs must renew this certification by clearing the same exam again.

This was a major complaint by many RIAs who felt it was unnecessary to sit for the same exam every few years just to keep their license. SEBI has now proposed that instead of taking the ‘base’ exam repeatedly every few years, RIAs must only sit for a refresher course, to keep abreast of the big changes that have happened in the world of investments.

Flexibility of fee models

SEBI has proposed more flexibility in the way RIAs can charge their customers. It has proposed that they can switch between the modes multiple times without any restriction on the minimum period between the two fee mode changes.

Here’s what it means. At present, RIAs can either charge a fee as a percentage (a maximum of 2.5 percent) of a client’s overall Assets Under Advice (AUA), or a fixed fee (maximum Rs 1.25 lakh per annum per family). If they are charging a client by one method and wish to change to the other one, they cannot switch before 12 months.

This, too, was a big grievance as RIAs typically use a combination of both. Typically, when she on-boards a client, she charges a flat fee, usually Rs 20,000-50,000 for an introductory meeting, risk profiling, understanding a client’s financial goals and so on. This exercise usually takes about a month or two. Once the client is on board, she switches to the to other mode of fee-charging, that is a percentage of AUA. Here it must be noted that many RIAs charge a fee every quarter. This means the fee clock starts from the next quarter itself, once the new client comes on-board.

Now, if the advisor has to change a flat fee (charged at the time of on-boarding) to a percentage fee, she has to wait for one full year before she charges the first year’s fee. This, many advisers say, is too late to start charging clients.

While Sadagopan says he is glad that SEBI  has considered the switching option, he says the maximum fee that RIAs can charge, is still low. RIAs should be allowed to charge as per their assessment of how complex the case is, he says.

No longer costly to set up RIA practice

SEBI has also proposed lowering the cost of compliance in setting up and running an RIA profession.

It has suggested that RIAs should not be required to put forth a networth to start. At present, an RIA needs to have a minimum networth of Rs 5 lakh. A corporate RIA should have a minimum networth of Rs 50 lakh.

Instead, SEBI has proposed that all RIAs must deposit a sum of money (from Rs 1 lakh-10 lakh; more the number of clients, higher the deposit) with a stock exchange to pay for any disputes at a later stage.

A higher networth also comes to bite individual RIAs at some point when their number of clients exceed 150. As per current regulations, once the number of her clients exceeds 150, she has to convert her individual RIA membership into a corporate RIA. In this case, she needs to bring in additional networth; at least Rs 50 lakh.

Here's another sweetener - SEBI has proposed that individual RIAs must register as corporate RIAs only if their number of clients exceeds 300, or if their fees collected that financial year exceed Rs 3 crore.

Can RIAs make your Will? Unlikely

SEBI has observed that many RIAs offer advice on aspects like Wills and estate planning, gold, real estate and so on. Here, SEBI's paper suggests that RIAs limit their advisory only on securities and instruments governed by financial sector regulators.

It has said that RIAs must not give advice around Wills and Estate planning, gold and real estate advisory. SEBI's proposal stems from the fear that if anything goes wrong and the customer complains to SEBI, the capital markets regulator would have no solution as these products or services do not come under its jurisdiction.

Vivek Rege, Founder & CEO , VR Wealth Advisors Pvt Ltd explains that corporate RIAs (firms) can give such advice but only through a seperate legal entity with a different legal and brand name.

Part time RIAs

In a somewhat peculiar move, SEBI has proposed to allow part-time RIAs. as per current norms, an RIA should be  full-time into the profession. The August 6 consultation paper recommends that part-time RIAs be allowed to take up (part-time) license. For instance, practising chartered accountants who file income-tax returns and insurance agents may be allowed to become part-time RIAs. Similarly, teachers, architects, lawyers, doctors and so on, can also become up part-time RIAs. Part - time RIAs are proposed to have not more than 75 clients.

To be sure, an RIA entails a collection of fee for advice rendered.

A closer reading of this proposal indicates that perhaps SEBI is trying to curb the growth of finfluencers and social media influencers. This, it wants to do, by bringing more and more people within the regulatory ambit, while at the same time, doesn't want to curtail the availability of advice, if it's genuine. Rege explains that even part-time RIAs would need to clear some tough exams to earn a license, so there'll be a bar for quality, even if the RIA is part-time.

Public comments and suggestions need to be sent in by August 26.