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Last Updated : Jan 20, 2020 09:01 AM IST | Source:

SEBI RIA consultation paper: Advisors can offer regular plans of MFs to clients

The regulator would now allow investment advisors to offer advisory as well as distribution services within the same outfit

The capital market regulator, Securities and Exchange Board of India (SEBI) has taken one more step towards fine-tuning the Investment Advisers (IA) guidelines that it had originally come out with in 2013. On January 15, SEBI issued a consultation paper – the fourth so far – in a step towards sharpening what constitutes investment advice. But most importantly, the latest proposal aims to separate investment advice (for which advisors can charge a fee) from mere distribution of mutual funds (for which a fund house pays a commission).

Here’s what the third consultation paper from SEBI means for investors.

Offering advisory and distribution services


SEBI would now allow investment advisors to offer advisory as well as distribution services within the same outfit, which is a departure from its earlier stance of having a clear line of separation.

Ever since it first issued the investment advisory guidelines, the regulator has been working on the demarcation between advisory and distribution of financial products. The idea was that your advisor must earn her fees only from you, the customer. She must not earn any commission or fees from the mutual fund. Distributors, meanwhile, have continued to earn their fees from fund houses. This demarcation also mandated, therefore, that if you seek an investment advisor’s help, she must sell you a direct plan of a mutual fund, which comes without any distributor’s fee embedded in it.

Many investors, though, would expect their advisors to execute the transaction themselves. Additionally, an advisor would also have some customers – mostly the older ones – that would not want to pay for a financial advice, as they just need to buy and sell mutual funds, periodically, after a bare minimum risk assessment.

In recent years – mainly through the first two consultation papers that it had issued (in October 2016 and a second in July 2017) – SEBI had been working towards better demarcation between advising and selling. In fact, its third consultation paper issued in January 2018 went a step further and said that investment advisors must make a choice between becoming RIAs and earning fees only from investors or remaining as distributors and earning commissions from fund houses. It was of the opinion that advisors can’t be doing both the activities.

The latest consultation paper is, therefore, an indication of the SEBI going soft on its earlier stand. However, it has asked advisors to segregate the two businesses at the client level. An RIA can offer both financial advisory as well as distribution services. However, an advisory client (one who pays fees) cannot be offered a distribution service and a distribution service client cannot be offered advisory services.

“The segregation at a client level should work well for advisors because now they can offer multiple services to all. Just that they have to earmark clients for a particular service and earn their fees accordingly. It gives more choice to the client as well, because he/she may just want to buy and sell mutual funds, without wanting to pay an advisory fee. She should be allowed to do so,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories.

Not all advisors are convinced. A Mumbai-based RIA said, on conditions of anonymity, that SEBI’s latest consultation paper doesn’t say that advisors can continue to earn commission income for non-fee clients. In other words, can they invest their clients’ money in regular plans (“these words are missing”) of MFs and earn commissions, he wonders.

The words ‘regular plan’ may be missing, but by specifying who needs to pay advisors advisory and who doesn’t, our reading of the consultation paper tells us that an investment advisor would be allowed to sell both direct and regular plans of MFs; just that clients have to be clearly earmarked in their books as those taking advisory or distribution services.

A cap on fees

SEBI has put a cap on the fees that investment advisors can charge. They can levy 2.5 percent per annum of the clients’ assets that they manage, called assets under advice or AUA or Rs 75,000 a year (a fixed fee every year).

All the RIAs that Moneycontrol spoke to aren’t happy with this cap. The RIA who chose to stay anonymous and quoted above said that a Rs 75,000 fee restriction is unviable. “You can control the medicine prices, but you cannot control the doctor fees. Similarly, you can cap a mutual fund’s fee because that is a product. But an RIA is a professional who renders investment advice. She should be free to fix her own charges”, he says.

Mrin Agarwal, a financial educator, and founder director of Finsafe India says that a cap of Rs 75,000 is not enough. “Many times, investment advisors handle complicated cases that justify charging of fees”, she says.

Besides, SEBI has also indicated that RIA can only collect advance fees for up to two quarters. Sadagopan says many advisors prefer to collect the entire year’s fee as advance, as it’s tough to chase clients later.

Higher networth

The paper also seeks to increase the networth of an RIA. Individual RIAs would be required to increase their networth to Rs 10 lakh, up from Rs 1 lakh at present. Corporate RIAs would be required to increase their networth to Rs 50 lakh, up from Rs 25 lakh. In doing so, SEBI wants investment advisors only of a certain pedigree and financial commitment to become investment advisors, instead of fly-by-night individuals or firms.

That’s not all. Individual RIAs with more than 150 clients or those with assets under advice in excess of Rs 40 crore will have to compulsorily re-register themselves as corporate RIAs. This move could hit some individual RIAs hard. “After the 2013 original regulations came, many of us re-adjusted our business models and segregated our investment advice and distribution business and committed resources accordingly. But SEBI’s latest consultation paper increases our financial and operational burden, all over again,” says the advisor who did not wish to be named.

Moneycontrol's take

If SEBI’s latest consultation paper does indeed allow RIAs to sell both direct and regular plans, depending on the service the customer chooses, then it’s a step forward in strengthening the regulations. It would nudge more distributors towards offering investment advisory for a fee. But the compulsory push to individual RIAs to become a firm once they cross the threshold of 150 clients or Rs 40 crore of assets under advice appears to be a dampener as it puts more financial burden on the advisor, in addition to the high compliance costs.

SEBI has invited comments by January 30, after which it is widely expected that it would revise the IA 2013 regulations.
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First Published on Jan 18, 2020 11:27 am
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