SEBI’s proposed fee collection portal for advisors evokes mixed response

As per SEBI regulations, payment of fees by clients to investment advisors has to go through a mode that shows traceability of funds.

The Securities and Exchange Board of India (SEBI) proposes to create a closed ecosystem for registered investment advisors and research analysts to collect fees from their clients. This will help investors identify and avoid unregistered entities.

This is part of SEBI’s overall drive to protect investors from financial influencers (finfluencers) or unregistered entities that may misguide or exploit investors.

In another consultation paper, SEBI has proposed that registered entities or intermediaries should have no relationship with unregistered finfluencers for any promotion or advertisement of their services.

How will the proposed payment system work?

As per SEBI regulations, payment of fees by clients to investment advisors (IAs) has to go through a mode that shows traceability of funds. It prohibits payment of fees in cash. Similarly for research analysts (RAs) who charge fees for the services offered by them.

Over the years, many unregistered entities have misled investors in breach of IA and RA regulations. The regulator is of the opinion that there is a need to proactively restrict their rise.

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As per SEBI’s consultation paper, in the proposed escrow-based mechanism, fees must be paid by clients on designated platforms specified by a SEBI-recognised supervisory body.

IAs or RAs will provide the details of the designated bank accounts in which fees would be received.

These designated bank accounts would then be used solely for collection of fees from investment advisory/research activity.

“SEBI is all for creating a transparent framework for all registered entities and investors. This is one such mechanism to protect investor interest. The mechanism will create additional trust in the minds of investors. However, for the new proposed mechanism to be a success, awareness will be the key,” said Priyadarshini Mulye, a SEBI-registered investment advisor and Founder of ARTHA FinPlan.

Not enough, say experts

In what could be a negative for investors, SEBI has proposed that any payment made outside the specified mechanism will not be considered as payment towards investment advisory or research services and, hence, no grievances in this regard will be entertained by SEBI or a recognised regulatory body.

“Surely, SEBI is looking at a broad spectrum of the fininfluencer issues and wants to be doubly sure that the client is paying straight to the registered advisor. But again, that same universal question. They're still regulating the regulated. What about unregulated people? Those people who are paying outside the system and they get conned, who's going to listen to them,” said Kalpesh N Ashar, a SEBI-registered investment advisor and Founder of Full Circle Financial Planners and Advisors.

Experts feel that the consultation paper fails to address the issue that most people are still unaware about registered advisors or even SEBI. If an unregistered entity or a scamster calls an investor promising 30-35-40 percent in returns, there are fears that many people will still fall for it.

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“Very clearly, SEBI is sorting the problem for themselves. It's very convenient from the SEBI point of view, to say that, if you're not going through this payment system, we will not entertain your complaint. It is definitely not useful for the investor,” said Suresh Sadagopan, a SEBI-registered investment advisor and Principal Officer at Ladder7 Wealth Planners Pvt. Ltd.

Putting onus on the investors

At present, new investors hardly have a mechanism to know whether they are paying to registered entities for investment advice or research services.

According to some experts, the lack of redressal mechanism if you pay your advisor outside the proposed filter route, may work as an incentive to investors for seeking advice or services of registered IAs or RAs only.

“If the investors are told that on payment via unregistered channels, there will be no recourse to approach the regulator, they will be forced to be extra careful and deal with registered entities only. This will eventually be beneficial for investors only,” said Vishal Dhawan, Founder and Chief Executive Officer, Plan Ahead Wealth Advisors.

Also, with the publishing and marketing of this new payment channel, people will be doubly sure that they are making payments to regulated entities.

Is SEBI over-regulating?

In the recent past, SEBI has come up with many regulations for IA, which experts have termed as “restrictive”.

Earlier this year, the regulator mandated that IAs must get pre-approval from a regulatory body for each communication, internal or external, with existing or potential clients.

This has resulted in delays on the part of IAs to provide services to their clients and has added to their costs. For example, individual advisors have to pay Rs 3,000 as processing charges for approval of each application. In certain cases, getting the approval from the regulatory body can take weeks.

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“We are already reeling under regulations. The delays due to this new process is going to be really challenging from our standpoint. This whole implementation reeks of over-control on SEBI’s part. It seems they want to know each and every transaction made by clients,” said Sadagopan.

There are also fears that since there will be a third party involved in the payment mechanism, IAs might face delays in cases of reconciliation.

Further, while it is not clear who will foot the bill for building and maintaining the payment gateway system, the IA community feels that it would be their burden.

Extra burden on clients

One SEBI-registered investment advisor (IA) on condition of anonymity told Moneycontrol, “This (proposed payment mechanism) would complicate things. The system is just adding one more stage to the clients' compliance. We have already signed a 20-30 page agreement with them, and then on top of that, we will have to set them up for a new payment ecosystem. Second, we will have to feed the client's details onto designated platforms. I'm not sure how the client will feel about it. Entering somebody's data into regulators' database, directly, I don't think has happened before.”

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Ashar is of the opinion that clients won’t be comfortable switching to the new payment method.

“I think I would not really vouch for it. The clients are already following our instructions and paying it to us. Now, for them to adopt one more thing and that also on payment, I think is really playing on very thin ice. The current payment system devised by SEBI is perfectly fine as per regulations. There is no need to repair what isn’t broken” the Founder of Full Circle Financial Planners and Advisors said.

What experts are suggesting

SEBI is seeking the views of stakeholders on the paper till September 15 and is asking for their opinions on whether the proposed mechanism for fee collection should be made optional or mandatory for IAs and RAs.

Most IAs Moneycontrol spoke with are in favour of making the mechanism optional. However, some experts are of the opinion that an optional system would not be successful at all.

“Making the mechanism optional won’t work because it will not be able to stop the nuisance of unregistered advisors. Most entities might take the optional route and in the end, investors will end up making payments to dubious entities,” said Dhawan.

Experts also say that if implemented and made mandatory, SEBI’s proposed new mechanism for RIA to collect their fees would need a big advertisement campaign that would make investors aware of the right (and perhaps only) mode of paying their financial advisors. Something, they say, on the lines of “Mutual Fund Sahi Hai” by the Association of Mutual Funds of India (AMFI; the mutual fund industry’s trade body).