All advisers could soon be accountable to Sebi

With Sebi’s proposed changes to the investment adviser regulations, advisers may not have to register with the regulator. All persons giving financial advice will be deemed to be under Sebi’s ambit


IStockPhoto
IStockPhoto

If you are confused whether your distributor is an adviser or not, you are not alone. Apart from 512 registered advisers, all the others giving ‘advice’ are not qualified to do so. There are indications that the Securities and Exchange Board of India (Sebi) will widen the reach of Sebi Investment Adviser Regulations, 2013 and bring more individuals and firms, who advise investors, under the regulatory ambit. Two Sebi insiders said that this is likely to happen in the board meeting to be held on 23 September.

This move was triggered by the loose use of the words like ‘adviser’ and ‘wealth manager’. Sebi has especially taken cognizance of unregistered investment advisers such as Aceinvestortrader. “Sebi has observed certain unregistered entities offering investment advice. To stem such occurrences, Sebi will amend the investment adviser regulations. After the amendment, any entity providing investment advice would be brought under the ambit of investment adviser regulations,” said the first person directly familiar with the developments. In simpler words, if the amendment takes place, all entities providing investment advice would be brought under Sebi’s jurisdiction. There would be no need to register as an investment adviser. And in case of violations or complaints, Sebi would start the proceedings straightaway .

What this means

Three years after the investment adviser regulations were issued, only 512 licences (both individuals and firms) have been issued, while there are almost 10,000 active distributors, and 70,000 have registered as one. The reluctance of many distributors to become advisers stems from the larger fiduciary role that the latter must play. Sebi, too, had left a loophole to allow independent financial advisers (IFAs) to continue ‘advising’ without becoming ‘registered advisers’. Sandeep Parekh, founder, Finsec Law Advisors, said, “The advisory’s fee-based activity becomes incidental to the distribution role and there is a specific exemption available to distributors providing investment advice incidentally.”

But are some distributors projecting themselves as investment or financial advisers, despite restricting themselves to mutual funds? We did a web search for “financial planner” and “investment adviser” across Mumbai, Bengaluru and Delhi to find out who are claiming to be investment or financial advisers; and whether they are registered with Sebi. Of the few we contacted, one was Solutions, a Mumbai-based mutual funds distributor which offers ‘financial planning’, ‘wealth management’, ‘investments’, ‘insurance’, and ‘tax management’ services.

“We do goal-based financial planning but we are not a registered investment adviser (RIA) because we are essentially distributors,” said Hemal Vasa, chief executive officer, Solutions. Apart from a financial check-up, Solutions also insist on regular client meetings. It doesn’t charge advisory fees if clients buy from it. So why hasn’t it registered with Sebi yet? “Once RIAs get feeds of direct plans, the picture will become clearer. There are operational issues. But next year, we plan to formally apply,” he says. 

It is because of such instances, where firms go beyond their mandate,  that Sebi plans to crack down. Suresh Sadagopan, founder, Ladder7 Financial Advisories, a Sebi-registered investment advisory, said that distributors charging fees is not the main issue, if they stick to just one product like mutual funds or insurance. “It is when a distributor starts to advise on multiple products that she comes under the ambit of an investment adviser. Because (then) you have a fiduciary responsibility. Money becomes fungible and who’s to say that an investor’s money meant for, say, fixed deposits, doesn’t get into mutual funds unfairly,” Sadagopan added.  

The issue is serious and most of the firms we spoke to said that they are in the midst of applying for the Sebi licence. But there are many others in the market who charge fees, recommend multiple products and have not yet registered. Sebi, on its part, has been vigilant though not many have been punished. “Apart from issuing public notices cautioning general public to deal with only Sebi registered investment advisers, and not get attracted by the trading tips provided by unrecognised persons, Sebi, on receiving information or complaint, undertakes a preliminary examination and collects all the necessary information...to ascertain compliance. In case of non-compliance or violation, appropriate action is being taken under the provisions of the Sebi Act, 1992 and investment adviser regulations," said a Sebi spokesperson. Apart from issuing 11 interim orders till date to individuals or entities it believes have violated the regulations, Sebi has also passed three final orders.

The problem doesn’t end here. Sadique Neelgund, founder, Network FP, a firm that trains aspiring financial planners said that their research showed that out of all the RIAs only about 200 actually offer personal financial advisory/planing services, the rest offer stock tips, equity research reports and private equity ideas. “So, even when investors approach a SEBI Registered IA, they have to be careful whom they are approaching and for what purpose,” he added.

As an investor, expect the difference between adviser and distributor to get clearer.

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