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Putting your stock adviser on a leash

Putting your stock adviser on a leash
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First Published: Sun, Oct 21 2007. 11 35 PM IST
Updated: Sun, Oct 21 2007. 11 35 PM IST
Pinky Shardul Nayak, a 30-year-old housewife from Mumbai, follows one clear principle while putting her money in stocks—don’t rely on stock tips or expert advice, follow your own gut instinct. It isn’t as if she is a veteran in the game of stock darts. Nayak is just a year into the gig but dabbles in stocks every day. She has realized that no one has a crystal ball to predict the markets, and takes each piece of stock advice with a pinch of salt.
Nayak is one of those rare investors who can actually tell the difference between the good and the bad stock advice. But can all of us do it? The answer is not hard to come by: No. More often than not, we listen to the stock tips given by our neighbour or colleague who made a fortune with companies such as Infosys Technologies Ltd or Bharti Airtel Ltd. Some of us also religiously follow the advice of an expert on the business channels on television.
With Indian markets generally on a roll for the fifth consecutive year, stock advice has been flying loose for quite some time. It’s not uncommon to find people from tier-II and tier-III towns such as Ludhiana or Jalandhar running stock tip websites from their homes.
But soon, all this could undergo a change. For the first time, the stock market regulator, the Securities and Exchange Board of India (Sebi), is firming up plans to regulate those who provide stock advice. As a first step, the regulator has come out with a set of rules and regulations on how it plans to monitor the stock advisers. It has also invited suggestions from the public, after which the final set of rules and regulations will be framed and enforced. We decode some of the jargon for you.
1. How will Sebi regulate stock advisers?
Sebi may require that all stock advisers get a certificate from a self-regulatory organization (SRO). Any adviser who gives advice in lieu of compensation, whether in the form of cash or any non-cash benefit, will have to get accreditation. Sebi’s draft regulations do not specify whether an adviser will be required to take a written test. At a later date, Sebi will designate an SRO, which can issue certificates. But the responsibility also lies with the investors, as they needs to ensure that once the rules are put in place, they deals only with the accredited advisers.
2. I take advice on initial public offerings (IPOs), listed stocks, or portfolio management services (PMS). Will advice on all these areas be regulated?
Yes. If your adviser gives you advice on securities in any manner—for IPOs or for stocks which are already listed or for porfolio management services—they will be covered by the investment adviser regulations.
3. So does this mean that even if my adviser is a 50-year-old person, with considerable experience, or if there is someone as young as 25, they will both need accreditation?
As of now, Sebi doesn’t mention any age limit. But there are certain exemptions from accreditation. If anyone is regulated or registered with Sebi in any way, they may not need accreditation. But they will have to comply with the other provisions of the proposed regulations.
4. Will the relationship managers at my broker’s office also be covered under the proposed rules?
No. Your relationship manager provides you advice as a part of the brokerage services and this is purely incidental to their profession. They are also regulated by the stockbrokers regulations of Sebi. If they provide general advice on the stock markets, then such advice will also be exempt.
5. If I get advice on mutual funds and other investment products such as insurance, will my adviser be accountable under the rules?
No. Sebi regulates mutual funds through a separate set of regulations; therefore, this won’t be covered under the proposed rules for the investment adviser. Since insurance schemes and other investment products do not come under the purview of Sebi, advice on such schemes won’t be covered by the proposed rules.
6. Will the stock market experts who write regularly in newspapers and magazines come under Sebi’s investor adviser regulations?
Yes, if such an adviser is associated with an entity registered by Sebi in any way, they will come under the purview of proposed rules. They may not need to obtain a separate certificate, but will have to abide by the code of conduct of the proposed regulations.
7. I regularly watch the business channels and I often call their helpline numbers to get tips and advice on the stocks I want to buy or sell. So, will the experts on these channels be regulated too?
Yes, as in the case of those who advise through newspapers, advisers belonging to Sebi-registered intermediaries, giving advice on television channels, will have to abide by the code of conduct of the proposed regulations.
However, if someone isn’t related to the stockbroking business in any way but still gives advice, Sebi will have no control over such advice. It expects the media to self-regulate themselves.
Sebi had first initiated action against a broker in December 2005, when it was found that he was misguiding television viewers by advising them to buy a particular scrip, while doing exactly the opposite in his personal capacity. The market regulator imposed a fine of Rs20 lakh on the broker.
8. I get recommendation reports about the initial public offerings (IPOs) from my broker. Will such advice on IPOs also be monitored?
It’s not clear yet if such advisory reports will come under the definition of investment advice. It’s possible that such advice will be construed as something incidental to the main activity of the broker.
9. What kind of transparency and ethics can I expect from these advisers?
According to the regulations, the adviser shall have a fiduciary relationship with you and therefore, they are bound to disclose any kind of conflict of interest, which they may face while giving you advice.
Advisers will also be expected to disclose the amount of commission and rewards they receive for recommending a stock. In addition, before they recommend you use the services of any particular broker, they would be required to disclose the commissions and rewards for such referrals. They are also expected to be open and fair to clients about their professional background, and the terms and conditions on which they offer advice. If any disciplinary action has been taken against them in the past, then they are mandatorily required to disclose this to you.
10. What recourse do I have if I am misguided and lose money?
Don’t be under the impression that the new regulations will solve all your problems.
As in any other profession, Sebi accreditation is not a guarantee that the investment adviser will give the best advice or a promise that they will always give you stock tips which will help you make money.
The idea is to ensure that the stock advice is given with appropriate disclosures. However, Sebi has the powers to cancel accreditation, or take action against accredited advisers if they are found to have violated the regulations.
Have you had issues with stock advisers? Let us know your story.
Write to us at businessoflife@livemint.com
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First Published: Sun, Oct 21 2007. 11 35 PM IST