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Viewpoint | What SEBI needs to do to make your investment advisor more accountable

Focus must increase on fee-only model, clear segregation of distribution and advice, and prudent use of client data

June 04, 2019 / 05:48 PM IST

Regulations are formulated for the orderly growth of an industry so that all participants work harmoniously and the relationship among stakeholders is a win-win one.

Markets regulator SEBI’s Investment Adviser (IA) Regulations of 2013 came into existence with the idea of creating a set of advisors who will provide only advice. These advisors were expected to represent their clients, operate on a fee-only mode, comply with higher standards in education and certifications, and have better processes. They were expected to perform the role of a fiduciary.

Many from the distribution community were expected to make the transition to being advisors, which was supposed to be the logical glide path in professional evolution. However, in the last six years only about 1300 IAs have registered themselves.

Fee-only advisory, ideal

The case for a fee-only, client-centric advisory is strong. This needs to be facilitated.


The regulation needs to provide a robust framework for this.  It is time to examine the existing framework and see if any improvements can be brought in to make it even more robust to help investors get a set of high-quality, conflict-free, fee-only advisors.

Investor focus: Such advisors are in fact very attractive for investors, who have hither-too only seen distributors doubling up as advisors. Any revision to the IA Regulation should preserve this deep investor focus and not be diluted to accommodate the business imperatives of intermediaries.

Clear segregation: Advisory & distribution are two distinctly different functions. The IA Regulation has allowed both the functions in a corporate setup, with appropriate segregation. In individual set-ups too, advisory & distribution functions have been allowed for different family members.

In fact, some individuals who are advisors are also directors in other entities that distribute. All these give rise to conflicts of interest, which are best avoided.

The way out is to allow the client to take either advisory or distribution services from one entity or related entities.

Representative Designations: Investors cannot make out a distributor from an advisor, at least from their designations.

The term ‘Financial Advisor’ is a commonly used designation by those distributing products. This designation is misleading and gives a wrong impression to the investor, about the nature of their work.

It is important to correctly represent the various participants in the financial services spectrum, so that the investors know clearly who they are dealing with, when they see the designation. Clear designations such as Mutual Fund Distributor, Investment Advisor – Fee-only, Investment Advisor – Fee + commission convey the right meaning as to what they really do. SEBI should allow the use of only such specific, approved designations.

Goal planning, not just investment suggestions

Incidental Advice: Many wrongly assume that they can offer incidental advice, which includes goal planning/ financial planning.

For instance, mutual fund(MF) distributors think that they can offer goal planning advice if they predominantly suggest MFs for investment. Professionals such as CAs and lawyers tend to think that the advice they give on investment matters is incidental advice, as this is not the main core area.

Such interpretations are creative and untenable. Any financial advice beyond basic suggestion of products will come under IA Regulations and advisors will need to register and comply.

Advisory services without being an IA: A lot of financial intermediaries offer advisory services, including financial planning, without registering under the IA Regulations. Many also charge for these services, with rates specified on their websites. Some charge a fee for these services, while others offer it on a complimentary basis.

This is a disservice to investors as such advisors don’t comply with required the standards and processes. This is also detrimental to IAs who had chosen to register and comply with the regulatory provisions, as they face unfair competition from people posing as advisors.

SEBI needs to immediately curb such practices and also setup a mechanism to report such abuse, in public interest.

Stock-tip providers: Currently, stock-tip providers come under IA Regulations. However, their recommendations cannot help in achieving goals or in comprehensive financial planning. They offer tips based on which an investor trades and possibly makes money in the short-term. In short, this is neither planning nor advice and is in the domain of speculative investment.

Hence, such stock-tip providers should not come under this regulation and need not be called Investment Advisors. They should come under a different regulation & should be governed by appropriate rules.

Client Data Sharing: Client data is a sensitive area. Only basic, required data needs to be shared within departments. Currently, client data gets shared across departments and even group firms to cross sell products/services, which is an abuse of trust.

Banking information is routinely used to pitch products, based on the amount available to the client’s credit. This is clearly a violation of privileged customer data being used for an inappropriate purpose.

The Regulation should address sharing & usage of client data. It should strictly define the boundaries here, considering the potential for abuse.

Globally, India is at the forefront of such fee-only advisory regulation. It is important to consolidate the gains made in this area, recalibrate and realign the regulation to benefit the investor. The regulation should also give long-term clarity on the path ahead, with clear boundaries to enable the advisors who have chosen to come under this regulation, to create a vibrant and thriving advisory profession.

(The writer is a SEBI Registered Investment Adviser & Founder of
Suresh Sadagopan
first published: Jun 4, 2019 10:56 am

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