Why SEBI fears on advice by RIAs on unregulated sectors are unfounded

Preparing a comprehensive financial plan

The dream of having a million investment advisers in India might finally become reality. And the motley group of around 900 SEBI (Securities and Exchange Board of India; India’s capital market regulator)- registered investment advisers have the regulator to thank for a progressive consultation paper it put out on August 6.

After much deliberation through a SEBI-appointed committee over several months, the capital market regulator has now proposed several changes in the stringent RIA regulations to lower the drawbridge a little, to be able to allow more prospective advisers to come in and be of help to the vast population of investors out there who want proper handholding and guidance for their money and finances. But one proposal sticks out like a sore thumb.

Unrelated or related advice

A proposal in the paper disallows investment advisors from offering services or products not regulated by SEBI or any other Indian financial regulator. The paper proposes that these products or services need to be offered through a separate entity with a separate brand. SEBI’s worry is that they (SEBI) will not be able to provide a grievance redressal mechanism for such unregulated products or services.

Let me give three simple examples why this proposal can backfire and can actually hurt the customer, rather than helping her.

One of our clients, Sundar, approached us for advice in respect of physical gold bars that he had inherited from his father. His requirement was to use the gold for his son’s marriage which was at least eight to 10 years away. We advised him to sell the gold and invest the proceeds into Sovereign Gold Bonds (SGB).

That way he would retain exposure to the asset class (gold) and get interest on the holding without attracting capital gains. He accepted the advice and wanted guidance on where and how to sell the gold. We provided guidance and he eventually bought SGBs from the sales proceeds.

Rakesh, another of our clients, owned two houses and ran his own consultancy company. He had negotiated the sale of his stake in the company and was expecting a substantial amount from the sale. He also wanted to sell one of his existing houses to buy a bigger house.

We advised him to sequence the two sales. First, sell the residential house. Then, finalise the stake sale. He could then use the stake sale proceeds and the house's capital gains to buy the new house. This would maximise the exemptions under sections 54 and 54F of the Income Tax Act. We guided him on the appropriate value for the house.

Rakesh was able to save substantial capital gains tax in a perfectly legitimate manner by carefully sequencing the two sales. Three years after buying the new property, Rakesh sold it. He then reinvested the sales proceeds in financial instruments.

A third client Nikhil had been investing systematically in mutual funds for the past many years. The funds were meant for the higher education expenses of his daughter. Nikhil was now deciding whether to take an education loan to fund his daughter's education instead of selling his mutual funds. The deduction of education loan interest reduced the interest costs of the education loan. In Nikhil’s case, the deduction reduced his taxable income below the threshold of Rs 50 lakh thus saving on 10 percent surcharge on his total income. Calculations showed that taking an education loan was better than selling his mutual funds.

A side benefit was that the daughter would take responsibility for repaying the education loan after she had obtained a job. She would be more inclined to treat the course seriously plus the mutual funds thus saved could be used for Nikhil’s retirement fund.

Comprehensive financial planning

These instances demonstrate how comprehensive financial planning can weave diverse services such as tax planning, estate planning with multiple products like gold, real estate, etc with financial products from the securities market. A multi-disciplinary approach is vital to the success of financial planning as a profession.

Sundar, Rakesh, and Nikhil's cases show that client needs cross regulatory borders. Financial planners are best placed to cater to such inter disciplinary needs of the clients.  All regulators put investors' needs first. A ban on providing such services, or using multiple brands would harm investors. A solution could be as follows.

Assuaging SEBI’s fears: the solution

IAs must clearly state that such services are unregulated. They are not covered by SEBI's grievance procedure. They must obtain clients' acceptance before providing such services. This should assuage SEBI’s concerns and at the same time allow clients to get the benefit of comprehensive planning advise from a single source. This is similar to the proposal for part-time Investment Advisors. They are required to inform clients that their core activities are non-regulated (or regulated by a different regulator). Any grievance against those services will not lie with SEBI.

This issue (along with placement of Trading Call Providers within the IA license) is among the few negatives in an otherwise path-breaking consultation paper.
Many proposals could, if well implemented, let more professionals join the investment advisory profession. They would also democratise access to fiduciary investment advice.

Among them are:

1) Removal of re-examination every 3 years
2) Relaxation in qualifications
3) Doing away with experience requirements
4) Introduction of a refresher course certification instead of a re-examination
5) Relaxation of net worth criteria
6) Relaxation in compulsory corporatisation norms and
7) Flexibility in fee charging methods.

The proposal for part-time investment advisers will likely attract many educationists and finfluencers. That's good for a profession that has struggled to meet the four-digit mark. There are just 995 IAs as of today to serve a country of 140 crores.

The regulator has always shown a consultative approach. I am confident it will solve the issues with the practise of comprehensive financial planning and the placement of Trading Call Providers within the right license type. If that is done, we can look forward to the ambitious target of a million RIAs set by the SEBI Chairperson in her October 4, 2023, address to the profession.