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Adviser regulations exempt almost everyone

Many intermediaries who sell products and advise on matters like risk profile are not included.
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First Published: Wed, Jan 23 2013. 08 32 PM IST
Jayachandran/Mint
Jayachandran/Mint
Updated: Thu, Jan 24 2013. 06 16 PM IST
On 21 January, the Securities and Exchange Board of India (Sebi) notified the final guidelines on investment adviser regulations. The objective of the regulation is to clearly distinguish an investment adviser from a distributor of financial products. Additionally, the regulations seek to create a standardized operating structure within which investment advisers will operate and also make them duly accountable for the advice they give.
Advantage for you
Other than the fact that it distinguishes agents and advisers, the guidelines also spell out the fiduciary duty of an adviser. This is done by listing out the steps an adviser needs to take for carrying out an accurate risk profile of the client and then determine what the suitable financial products are.
By virtue of the service, some advisers are already doing this, but now procedures and requirements have been standardized for your benefit. Says Nitin B. Vyakaranam, chief executive officer, Artha Yantra Corp. Pvt. Ltd, an online personal finance company, “As a practice, things such as risk profiling and ascertaining suitability are already built into our service as this is needed for an approach where you are not simply selling products but looking at overall objectives.”
Also, now your adviser is liable to disclose any material transactions which can impact you as a client or which may cause a conflict in the way your account is managed. This includes matters like disclosing their holdings in financial products that are also recommended to you or letting you know about compensation that may be received by suggesting an intermediary such as a stock broker for execution. Any complaint will be inspected by Sebi and the adviser will have to bear consequences (see table).
Transparency is something you can demand from your adviser, which will help you be in a better position to judge whether they are working in your interest. Moreover, your adviser has to maintain records (physical or electronic) of the entire process—from risk profiling to advising specific products and disclosing any conflict of interest for a period of five years. However, as Vyakaranam says, “Eventually, regulations need to consider the future of investment advisory, which is online, and address matters specifically where clients are receiving advice online.”
Things such as appointing a compliance officer, explicit segregation of distribution services and inspection of records and operations by Sebi are welcome changes for you.
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Impact on industry
Investment advisory firms: When the draft guidelines were issued, members of the industry welcomed the transparency and accountability that the guidelines brought in, but were sceptical about how effective they will be. This is because in case of companies or banks operating in this domain, not much has changed.
The regulation does not require separation of the two businesses, rather simply asks to route the commissions separately through a different department and puts in place a Chinese wall of sorts where an entity has both advisory and distribution business. So other than some compliance and operational changes, there is not much to do. Says Gautam Mehra, executive director-tax and regulatory services, PricewaterhouseCoopers, “The regulations specifically provide that investment advisers which are banks, NBFCs and corporates providing distribution or execution services to clients need to keep their investment advisory services segregated from such activities. There is no mention of necessarily having separate entities for carrying out these activities.”
Financial planners and independent financial advisers (IFAs): The maximum impact is on financial planners, who already charge a fee for advice. The final guideline, like the draft issued last year, is silent on how IFAs must segregate distribution income from advisory fees. Since it is difficult for an individual to set up two different departments to address the matters of distribution and advisory, it means that they will have to let go of the distribution income.
Says Suresh Sadagopan, a Mumbai-based financial planner, “For those who are starting out as financial planners, a bulk of the income comes from distribution and only 15-20% from fees. They have little incentive to continue trying to establish themselves as financial planners and rather move back to distribution.” For IFAs, who do not charge advisory fees, the choice is simple; remain pure distributors.
The regulation doesn’t cover a number of intermediaries such as mutual fund distributors, insurance advisers, pension advisers and stock brokers, which means an IFA who is distributing mutual funds and insurance, doesn’t need to be registered or certified as an investment adviser. Mehra agrees, “The Regulation has exempted mutual fund distributors who are members of a Sebi recognized body or registered with an AMC association (say Amfi) from registering under these regulations and hence, such persons will fall outside the purview of this regulation.”
While an adviser is restricted from charging distribution fees, it doesn’t mean that a distributor can’t negotiate and charge an amount over and above the transaction cost from clients. Adds Sadagopan, “Given that it’s difficult to establish as an adviser, there is always the possibility that a distributor can charge transaction fees over and above the commission for advice, but not mention it as advisory fee.”
Qualification required
It is desirable that your adviser is qualified and certified as directed by Sebi. However, as things stand now, the certified financial planner (CFP) certification from the Financial Planning Standards Board India does not require graduation as a pre-condition for starting the CFP module.
Whereas, the new regulations do need at least a graduate level qualification. Sadagopan says, “This mismatch can create a peculiar situation for people currently studying towards the CFP certification.”
Mint Money take
Undoubtedly a structure which encourages transparency and puts advisers over distributors is desirable. But by only distinguishing the agent from an adviser this may not be achieved.
The regulation does not include under its purview a vast number of intermediaries who along with selling products also advise on matters such as risk profile as an inherent part of the service. For companies or banks that were offering both, what is the incentive to grow the advisory business, if you can continue to receive commissions separately? Other than a small segment of fee-charging financial planners, no one in the industry is materially affected, putting a shadow on the coverage of the regulation.
As it stands now, the new regulations will act as a disincentive for a distributor to embrace being an investment adviser. The matter gets complicated as the regulation addresses to define how an adviser can earn, which essentially should be left to the client to decide.
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First Published: Wed, Jan 23 2013. 08 32 PM IST
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