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Your registered financial advisor can either advise or sell mutual funds; not both

In a step down from its earlier proposal, Sebi has allowed investment advisors to decide charges.

July 05, 2020 / 07:06 AM IST

The capital market regulator, Securities and Exchange Board of India (SEBI), has amended the SEBI Investment Advisers Regulations 2013 and has said that registered investment advisors must segregate the advisory and distribution activities.

Thus, if your investment advisor is an individual, then she can either offer you investment advisory services or distribution services. If she offers investment advisory to you, then she will charge a fee. And she cannot earn a commission from mutual funds that you eventually invest in, based on her advice.

If she offers you distribution services - or to put it simply, you analyse and decide which mutual fund schemes you want to invest in and then go to her simply to get the plan executed - then she can earn a commission from mutual funds. But she cannot charge you an advisory fee.

Further, the family of an investment advisor cannot offer the other leg of service to the same client. For instance, many advisors used offer pure investment advisory services to their clients whereby clients then used to buy those funds through a separate firm run by the advisor’s family or spouse. Not anymore.

To be sure, at some point in the past when SEBI was deliberating on the Investment Advisor guidelines, it had suggested that family members of investment advisors should not be allowed to work in the same intermediary business.

SEBI has softened its stand on that, but has now ruled that a single client would not be served by both, an investment advisor and her family member. And if the client does indeed go to both of them (the advisor and distributor from the same family), then the advisor-distributor can only earn from one of their services; either investment advisory or distribution.

However, if the advisor is a corporate firm, then it needs to segregate advisory and distribution services at a client level. This means, it can offer either advisory or distribution services to a client. Your investment advisor, be it an individual or a corporate firm, will need to invest your money in a direct plan. A direct plan comes with lower costs as distributor costs aren’t embedded in them.

To push more individual advisors to become corporate advisors, SEBI has said that all those individual advisors with more than 150 clients must apply for a corporate license. The networth of an individual advisor has been hiked to Rs five lakh, up from Rs one lakh currently and that of a non-individual advisors’ has been hiked to Rs 50 lakh, up from Rs 25 lakh currently.

These rules will come into effect from October 3.

Kayezad E Adajania
Kayezad E Adajania
first published: Jul 4, 2020 04:56 pm