Home / Opinion / Advisers hesitating to register with Sebi may be wrong

A question I often ask my fellow advisers and product distributors at various conferences, forums and meetings is: are you considering to become a registered investment adviser (RIA)? The question may seem presumptuous, especially considering that many advisers got the RIA licence early on.

The typical responses I get are:

My primary activity is selling products and I earn only commissions as my remuneration.

I only distribute funds. So, I don’t really need to become an RIA.

I don’t charge my clients, so I don’t need to become an RIA.

The fee for body corporate and companies is too steep and unfair. (The Securities and Exchange Board of India, or Sebi, changed the RIA fee to 5 lakh from 1 lakh in May 2014.)

My business is too small for Sebi to be concerned with.

The regulation is ambiguous at many places and compliance requirements are not very clear.

The compliance cost is high and there may be too many questions from Sebi, whereas advisers who choose to not register continue to operate without any problems.

From their perspective, they may be right, but advisers and distributors must accept that they need to be more client-centric.

If we take a step back and see, the regulation was not put in force to create problems for the existing and future advisers but rather to develop trust and confidence of clients after years of wrongful selling. The opening sentence in Section III–General Obligations and Responsibilities Section of the Securities and Exchange Board of India (Portfolio Managers) Regulations, 1993, reads: “An investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise."

Apart from this, the requirements of qualification, infrastructure, systems and processes ensure that skilled and responsible professionals enter the advisory space. The regulation stipulates risk profiling, asset allocation, independence, objectivity and suitability criteria for adequate risk management on behalf of the client.

Let’s say, an adviser does not charge any fee to a client and, hence, does not register as an Investment Adviser (IA). Does this absolve the adviser of her fiduciary responsibility? My view is that the fee model is a business decision of the adviser and should not drive the decision about IA registration.

Whether a service provider is an adviser or a distributor may be determined by identifying who its client is. Distributors are more aligned to product manufacturers, whereas an adviser’s client is mostly the retail investor. Distributors are compensated by manufacturers, so they tend to have their allegiance to manufacturers. One analogy I can give is advisers are like doctors and distributors like pharmacists. A pharmacist does not provide medication without a prescription. It would be quite beneficial to the whole ecosystem if distributors ask for signed prescription from a registered adviser if a client wants to buy an investment product. Of course, there are always over-the-counter drugs (or simple investment products) that do not require a doctor’s intervention!

In various presentations and discussions, issues in IA regulations are raised. However, financial service providers are not reading the writings on the wall. In one recent discussion in a forum, panellists seemed to indicate that there is still time to register with Sebi as an IA and that doing so may not be necessary at this point. However, the fact is that after 21 October 2013, no service provider in the advisory business is allowed to continue the practice if she has not already applied to register with Sebi.

We may not like the regulation because it requires us to change, but no amount of discussion or interpretation will change the real intent of being fiduciary to the client. It is better to follow the spirit of the regulation rather than the letter. When advisers and distributors totally agree about being ethical and pro-client, then isn’t it a natural course for the advisers to register for IA?

There are 285 RIAs in India, according to the latest data published on the market regulator’s website. Though there is no definitive number of practising financial advisers, the current registration number is a minuscule fraction of the total. Among the developed countries, the US has the oldest regulation—Investment Advisers Act of 1940. Others such as the UK and Singapore have realised the importance of the fiduciary duties of financial providers and put in place the Retail Distribution Review and Financial Advisers Act, respectively. The ratio of clients varies from 1,000 in the US to 3,000 in the UK and 250 in Singapore per adviser. In India, that number is difficult to arrive at, but expected to be over 10,000 per adviser based on the market potential.

Client awareness will be an important factor in adoption of the regulation. It may be a good idea for Sebi to advertise about IA regulations on television and in print. Once prospects and clients start asking about the regulation, the service providers will be forced to change and more advisers with registration will emerge in the industry. That will be the required evolution for the benefit of the overall financial advisory industry. As such, more and more people in India require genuine and holistic financial services, and the ever-growing market presents a huge opportunity to existing and future advisers.

Anup Bansal, managing director, Mitraz Financial Services Pvt. Ltd.

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