Why the awareness about SEBI Registered Investment Advisers (RIA) is abysmally low?

Since 2013 after the regulations came out, SEBI has not come out with any ad campaign apprising the general public about RIAs and their role.

Despite nearly a decade of the Securities and Exchange Board of India (SEBI) regulations separating distribution and advice, awareness about Registered Investment Advisors (RIA) is still abysmally low among investors.

As per an Edelweiss report, presently in India, there are about 3.4 crore unique mutual fund account holders and 6 crore unique demat accounts.
Compare this to just about 1,300 RIAs in the country, which is abysmal. This figure has more or less remained static in recent years. This is further compounded by the problems that RIAs experience in running and sustaining their advisory practice due to exhaustive regulations.

There are many challenges which prevail about the awareness of RIAs. The main reasons are:

Identity problem

Financial adviser, investment adviser, financial planner, wealth manager, investment manager, portfolio manager – these nomenclatures are often used generically by varied professionals in the financial services industry. It is not easy for an average consumer to distinguish between financial product sellers and providers of investment advisory services as these terms are tossed around interchangeably.

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This is despite SEBI stipulating that any distributor selling investment products like mutual funds, shares, ETFs, etc, should not use the word ‘Adviser’ unless he/she is registered with SEBI. At the ground level, this awareness is close to nil among the general public and the rules are brazenly flouted by many product sellers.

Incidental advice

An agent selling mutual funds, ETFs, or any other products coming under the purview of SEBI, can earn a commission from such products and can only provide incidental advice dispensed during the transaction process. The agent cannot provide investment advice as he/she is not equipped as an RIA.

To be sure, SEBI has defined incidental advice as: “Incidental activity with respect to distribution of mutual funds means providing basic advice pertaining to investment in mutual fund schemes limited to such schemes/ products being distributed by a mutual fund distributor to his clients/ investors or any other mutual fund product.”

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What basic investment advice means here is ambiguous. Incidental advice is hence a grey area and can be easily misused. Under the garb of incidental advice, many product sellers offer full investment advisory services, even financial planning services without registering with SEBI, leading to more confusion, and inefficient and misleading information amongst investors.

Different regulatory grounds for same products

Besides loans, banks earn a significant income by pushing their own products ranging from mutual funds, insurance, etc. There is a clear conflict of interest leading to countless cases of mis-selling to gullible investors.

Although banks distribute investment products like mutual funds with ambitious sales targets, they are regulated by the Reserve Bank of India.
Similarly, insurance products are regulated by IRDAI, including unit linked insurance plans which invest in the equity markets. The agent proclaiming himself/herself as a financial adviser is remunerated by the insurance company.

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The majority of the financial products in the banking and insurance space are sales based rather than recommended on suitability. Different regulators operate on different turfs and under different regulations. There is no uniformity in norms across the same financial products sold under different distributors and directed by different regulators.

Lack of advertising

The popular ‘Mutual Funds Sahi hai’ ad campaign launched by the Association of Mutual Funds (AMFI) has attracted millions of investors since early 2017. Several campaigns by AMFI (a non-profit body) have educated investors and instilled confidence in them to invest in mutual funds. Even the RBI runs the 'RBI Kehta Hai' ad campaign to educate and empower the public about banking regulations, and also to make them aware of safe banking practices. While there are many general investor awareness sessions conducted by various stock exchanges, SEBI is not into advertising.

Since 2013 after the regulations came out, SEBI has not come out with any ad campaign apprising the general public about RIAs and their role.

The end result is that investors have no clear idea about the specific roles of the various players in the financial services ecosystem. They are not aware of the choices they can make, of paying commissions to distributors and/or paying fees to RIA and the difference between the two.

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The Association of Registered Investment Advisers (ARIA), a fraternity of RIAs, is making concerted efforts in a gradual manner to support the development of the investment advisor community and spread awareness about them. The SEBI has now gradually recognised the role of ARIA and their advocacy initiatives in formulating regulations and is taking cognisance of the challenges the fraternity faces despite working in the best interest of investors.

The road ahead is a long one but a small start has been made.