Life after 3 years for investment advisers
- Going beyond the problems of bitcoin
- Individual investments in financial assets continue to grow faster in FY17
- It is possible to insure gold lying in your bank locker as well as that at your house
- Bankrupt corporations don’t need protection
- A financial plan that was a reality check on where we stand today
Every time the Securities and Exchange Board of India (Sebi) publishes a paper, a notification or a press release; reactions pour in from stakeholders as to how this change will affect them, and how this change is detrimental, not thought through and sudden. We know that nothing is permanent. Do we need the regulator to remind us of that periodically?
The latest consultation paper on the investment adviser guidelines has at least one new feature: it provides a 3-year window to align to the norms once they are law. It tell me that the powers-that-are, are indeed listening.
In 2013, when the Sebi (Investment Advisers) Regulations came into force—and 9 months were provided for ‘advisers’ to fall in line—many exemptions were provided. For example, mutual fund distributors providing advice incidental to sale of their product, were exempt. The options given were simple: either get commission on the product, or fees from clients. For those in business for a decade or more, commissions—including trail fees—were a substantive amount and could not be forsaken. The new consultation paper specifically proposes that those transitioning to investment adviser continue to be “allowed to receive trail commission for products already distributed subject to disclosures to the clients”. Possibly quells the rumour that trail commission would be abolished sometime soon. However, it clarifies that individuals cannot provide both advisory and execution services—only corporate entities can; and they need to segregate these services through a subsidiary and not a separate division.
That brings us to the disclosures. Current regulations have three specific disclosures: disclose all conflicts of interest as and when they arise; disclose any consideration by way of remuneration or compensation in any form for distribution and execution services of the products provided; disclose any actual or potential conflicts of interest that may arise on account of any connection with the issuer of the product, which might compromise the objectivity or independence of the investment adviser.
Apart from banks and national distributors, individuals selling mutual funds were proud to call themselves ‘independent financial advisers’. This term, along with ’wealth adviser’, has been prohibited for use by anyone who is not registered. The alternative is to stay away from advising but then you will not be allowed to provide even incidental advice or recommend a specific product. In a market where investing in market-linked (debt or equity) products is nascent and not understood, it can strain the investor’s ability to select the right mutual fund. Even robo-advisory services and do-it-yourself discount offerings would not be able to recommend products unless they register, and have execution services in another entity.
While the underlying purpose of the regulation is to protect customer interest, I have also heard the term financial inclusion often. Over the next 3 years, when this paper could become law, I expect that there will be many opportunities for investors to be exposed to the benefits of investing in mutual funds as well as to learn the finer nuances of these regulations. The distinction between advice and execution services, as well as the need to pay fees for advice, will be established. If the investor does learn quickly, there could be a substantial role that robo-advisors will play in getting newer and smaller investors into these market-linked instruments.
India is a vast market, and hence, needs to have multiple intermediary models. The mutual fund distributor providing execution-only services will thrive if the investor can make selections herself. As the market matures, and we start moving towards index-based investing and exchange-traded funds, the distributor will thrive. While that happens, using technology is a must for scale. However, that requires investment and there is a possibility of consolidation of distributors: some of them may even partner with established advisers.
For investment advisers, this paper is like warm rays of the morning sun. For one, these are baby steps in recognising advice as a profession. There is a clear-cut demarcation of roles in the mutual fund intermediation space and also a push for the more serious advisers to create corporate entities. Most advisers know that advice that isn’t acted on is of no value, and hence having an execution subsidiary with full disclosures is a win-win for the investor and hence, themselves. The proposed ban on stock trading tips and use of social media will also help weed out unnecessary competition, and keep the investor mind focussed on the long term; on goal-based investing.
Finally, fees are here to stay. For many years now, I have heard senior professionals say “India is not ready for fees” and have always wondered when the investor will wake up one day and say, “Ok, I am ready.” It is the adviser who has to command (yes, initially demand) fees by showing the investor value, and value is not just returns from investment. It is advice, sometimes where not to invest; it is having a thinking partner, who holds your hand and calms you down during volatile times. It is service: of executing advice, of providing consolidated statements, periodic views and year-end reports for tax purposes; it is someone who is competent not just with numbers but also compassionate and understands you. Now wouldn’t you be willing to pay an arm and a leg for that? If you do, the day of the true fiduciary (a person to whom power is entrusted for the benefit of another) is here to stay.
Lovaii Navlakhi is a certified financial planner and the founder and chief executive officer of International Money Matters Pvt. Ltd, a Sebi registered investment advisory.