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In 2009, the capital markets regulator, Securities and Exchange Board of India (Sebi), made it mandatory for distributors of all mutual fund (MF) products to disclose the commissions they earn from selling schemes and also from competing products. The idea was to ensure transparency for investors. But there are different kinds of distributors. Some are straightforward agents who represent the fund house. Then there are advisers who take a more comprehensive view of your financial plan and recommend schemes accordingly. So, in January the market regulator took the next logical step with the Sebi (Investment Advisers) Regulations, 2013, to distinguish between an agent and an adviser. Though the list of registered advisers hasn’t been updated on Sebi’s website, it has reportedly received about 70 applications from individuals and companies. This means that your planner can now be a Sebi certified investment adviser after registering under the new guidelines. It may give you an additional sense of security to know that your planner is accountable to a regulatory body.

What’s in it for you

The foremost advantage is that the guidelines clearly distinguish between an adviser and a distributor (or agent). Your adviser can earn only through the fees she charges you whereas your distributor can earn commissions from the asset management company. An adviser who earns only from client fees will not be inclined to favour any MF product. Moreover, only a registered adviser can use the term “investment adviser" to describe the services she provides. Apart from administrative requirements such as appointing a compliance officer and getting records inspected and audited at regular intervals, the disclosure requirements go further and address the potential conflict that may arise for the adviser in product selection or transaction advice. This doesn’t mean that your adviser isn’t also earning through distribution.

What the rules say is that the advisory and the distribution have to be kept far apart, in separately identifiable divisions. Suresh Sadagopan, a Mumbai-based certified financial planner and founder, Ladder7 Financial Advisory, recently altered his business model to comply with the regulatory requirements. “We have entirely separate entities for distribution and advisory. We let our fee-paying clients know about the distribution arm, but ultimately, it’s their choice whether they want to execute through that arm or not," he says.

These guidelines also allow you to seek as much information and transparency as you need to make your investment decision. Any complaint can be reported to Sebi, which has already defined the consequences of any wrongdoing.

The gray areas

Even though Sebi has attempted to clearly define an adviser and her roles, ambiguities remain. For example, the person with whom you have dealt with for years to choose the right MF scheme or an insurance policy, may not be required to register under this regulation. Registered or not, she is in spirit your financial adviser.

The guidelines also explicitly exempt certain categories of professionals who may be incidental to your financial planning process, like your chartered accountant or your distributor who is registered with the Association of Mutual Funds in India (Amfi).

If you look at it from the other side, it is expensive and difficult for an individual adviser to follow all the procedures. Therefore, while the person may continue to function as your adviser, she may prefer to be out of Sebi’s regulatory ambit. Says Raghvendra Nath, managing director, Ladderup Wealth Management: “As of now, there is some confusion. Amfi has clarified to us that distributors registered with it needn’t apply. Moreover, if I become an adviser and start charging a fee, the client may actually lose out as the mathematics of expense ratios in MFs plus the fee may work out to be more expensive."

Mint Money take

The biggest impediment to the advisory business in India is that many investors don’t feel the need to pay a fee for the service. Nath says, “People are willing to pay, but problems arise in a year when returns have been bad and clients are not willing to pay. At the same time, they don’t really pay more in a good year. For low-ticket accounts, collecting small amounts of fee is difficult." At the moment, the industry is structured in such a way that only a thin line separates a pure distribution set up and an advisory. There are many worthy planners who charge fees from clients but a significant part of whose overall income comes from trail commissions; a criteria if met, exempts the planner from these regulations. Despite the ambiguities, this rule benefits the investor. Unless you have a trusted adviser who has been with you for many years, and given that the number of Sebi-registered investment advisers is still small, it makes sense to at least opt for those who charge a fee, give good advice and whose processes and customer service satisfy you. As clarifications come for these regulations, we expect more planners warming up to them.

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