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Why SEBI’s norms may limit the advisory role of mutual fund distributors

With SEBI’s diktat, a mutual fund distributor now cannot advise you on your queries related to other investments

December 04, 2020 / 10:13 AM IST

For several families, mutual fund (MF) distributors, who were also known as independent financial advisors or IFAs, were those they’d turn to when seeking advice on a  range of financial matters.

However, your MF distributor or IFA may not be able to give you financial advice as freely as before, following the newly-introduced regulations of    the Securities and Exchange Board of India (SEBI).

The new norms say there should be client-level segregation; i.e., if the client has opted for distribution services, he/she cannot take advisory service from the same group or family of the registered investment advisor (RIA). Similarly, a client who has opted for advisory services will not be eligible for distribution services with the same group or family of the RIA.

At the group level, there can be segregation of clients, but an individual MF distributor can only offer distribution services and incidental advice. Full-fledged advice can be given only if he has satisfies the eligibility criteria for getting the license to become a registered investment advisor (RIA) and completely shifts to a fee-based advisory model.

Other than deciding on the suitability of a mutual fund scheme for your purpose, which is still required to curb mis-selling (SEBI’s 2012 circular), the MF distributor now cannot advise you on your queries related to other investments.


The distributor is only allowed to give incidental advice on MF products.

SEBI also wants changes in nomenclature. By December 31, 2020, IFAs need to make changes in their registered names, so that the ‘advisor’ bit is taken out and they are identified as mutual fund distributors. The regulator doesn’t want terms such as adviser, advisor, financial adviser, investment adviser, wealth adviser, and wealth manager to be used by MF distributors. Distributors and MF industry experts say there can be fresh challenges on the ground.

Not enough advisors

An IFA could earlier not only advise you on MF products for your investments, but also make a financial plan for your goals.

Now, only a registered investment advisor (RIA) can play the role of a financial planner.

“Such restrictions will not help customers. Customers may come to an MF distributor not only for help with investing in MFs, but may also want advice on their stock portfolio, or would need a financial plan,” says Dhruv Mehta, chairman, Sapient Wealth Advisors and Brokers, and also chairman of the Foundation of Independent Financial Advisors.

He says that these restrictions will make it difficult for financial advice to reach a wider population.

“There are only about 1,000-1,500 RIAs at present. By saying that they are the only ones that can give advice, the larger population is being restricted from accessing financial advice,” Mehta says.

There is also the issue of affordability. Speaking in a panel discussion titled, ‘India: Fund Industry at the Crossroads’ at the Morningstar Investment Conference, Sandeep Parekh, who is the founder of Finsec Law Advisors, and former executive director at SEBI, pointed out that an investor with a Rs 500 systematic investment plan, is not going to separately hire an advisor and pay an annual fee of Rs 20,000.

He cited the UK example, where changes in regulations made it difficult for smaller-ticket investors to gain access to advice.

What is construed as advice?

In the same panel discussion, Nilesh Shah, managing director of Kotak MF, said that while a distributor is permitted to give some incidental advice, one will have to be careful about the lakhsman rekha on advice and ensure that it doesn’t become advisory practice.

“This creates doubts and confusion in the minds of distributors, investors, as well as those giving advice,” he said.

MF distributors feel clarity is needed to understand the extent to which a distributor can freely advise his or her client.

“First-time MF investors usually need a lot of hand-holding to understand which product would be suitable for them and they have a range of questions. And the MF distributor will have to address these queries to help client make a better investment decision,” says an MF distributor, requesting anonymity.

“We are not sure whether we can tell clients to take money off the table when markets are rallying and switch to alternative assets, and whether such a suggestion will be construed as advice,” says Srikanth Matrubai, chief executive officer of SriKavi Wealth.

Looking for alternatives

If an MF distributor wants to offer services such as goal planning, financial planning, he/she has to transition becoming an RIA, and SEBI has laid down compliance norms for the same.

He or she needs to have a minimum net-worth of Rs 500,000. The RIA also needs to have certain minimum qualifications.

The RIA must hold professional qualification/ a post-graduate diploma, experience of at least five years and certification on the subject related to the advice being offered.

Those with more than 150 clients, need to re-register themselves as non-individual RIAs and also ensure that their RIA business entity has a net-worth of at least Rs 50 lakh.

To help mutual fund distributors, as well RIAs, make the transition Mercury Platform Services and Vijya iPrism Infotech are setting up a shared services and infrastructure company, where distributors and RIAs will be shareholders.

So far, 52 MF distributors and RIAs have come on board and have picked up stakes in this new entity.

“This entity will approach SEBI for an RIA corporate (non-individual) license, meet the net-worth requirement through the pooled resources of the shareholders, and also manage other activities such as compliance requirements, audit and technology,” says Aakash Bansal, co-founder and chief executive officer of Mercury Financial.

An advisory division will be set-up for offering multi-asset advice. The company will also be pooling resources for other activities.

Pune-based Finnovators Services is also considering pooling resources with other MF distributors, and could look at the RIA business model at a later stage.

“We could have a model, in which a client engaging with us for our distribution services, can later be moved to the RIA model and offered advisory services. But, we need to work out the finer details. We are still in the preliminary stage,” says KV Balaji, director at Finnovator Services.
Jash Kriplani
first published: Dec 4, 2020 10:13 am

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