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Investment advisors not sure how Sebi’s proposals will work

Investment advisors not sure how Sebi's proposals will work

Stock-market regulator Sebi wants to change the way investment advice is dispensed in this country. But the advisors themselves, while saying they realize the need for regulation in their industry, aren’t sure how this will be implemented.

In an effort to protect investors, Sebi wants companies that offer advice on investing in stocks, mutual funds, insurance products and commodities to create a self-regulating organization (SRO) that will monitor and regulate all investment advisories. The regulator has invited comments from the public on its ideas and has posted a consultative paper on its website (the full text of the paper can also be seen at http://livemint.com/sebi.htm)

“There are all sorts of advisors in the market," says Ashok Kumar, director of Lotus Knowlwealth, an independent financial advisory firm. “Like most of Sebi’s initiatives, which look good on paper, it needs to be seen how this concept will be implemented. The regulator should focus more on educating the investors about what kind of advice they should look out for."

The investment advisory business in the country is quite fragmented. There are banks that offer this service to their clients; certified financial planners who receive a certification from the Financial Planning Standards Board of India (FPSB), a body that works with the industry to set standards that are eventually targeted at protecting investors; stock- market advisors such as brokers; independent financial planners; and boutique firms that are in the business of offering portfolio management services.

“Conceptually, it makes sense to have such a (regulatory) structure, and there is clearly a need to discipline people, especially those who render advice on stock investing," says S.V. Prasad, chairman, Chime Consulting. But not everyone is convinced a self-regulating mechanism will work. “I don’t have any reservations about a regulatory framework, but I have my apprehensions over the success of an SRO model," says S.P. Tulsian, an independent financial consultant.

“Indeed, it’s high time that we had a water-tight system of giving out advice," says Kartik Jhaveri, director at Transcend Consulting, an independent financial advisory firm. “Today, nobody stops an insurance agent from calling himself a planner. One fundamental issue which needs to be addressed is the level of education of the advisors. You cannot have a standard regulation for all kind of advisors. The proposed SRO should first categorize advisors based on their skill-set, knowledge and experience. Then it should go on to specify rules, code of conduct, etc."

Arun Kejriwal, a stock-market strategist, says asking investment advisors to be well-versed with all financial products could be a recipe for disaster.

“Today, most advisors have expertise in one or two asset classes. If someone specializes in stock markets, it’s not necessary that he will be an expert in other classes such as gold or real estate," says Kejriwal. He further points out that regulations shouldn’t be restricted to investment advisors. “Even journalists, especially television anchors, should be brought under the regulatory framework. They are also rendering similar advice based on their internal research. So, why aren’t they made to disclose their personal holdings in stocks and those of their family members?" asks Kejriwal.

In an interview with Mint that was carried on Monday, Sebi chief M. Damodaran said, “Over time, we expect that all those who give investment advice must be registered with Sebi."

Meanwhile, FPSB chief Ranjeet Mudholkar hopes to work closely with the regulator. “Earlier, we had already sent out a note to all the regulators on how advising should be separated from pure selling. After this new concept paper from Sebi, we will see how closely we can work with the regulator in the desired manner," Mudholkar said.

The regulator’s initiative to tame the investment advisory community stems from the fact that there are no specific regulations in place. “The current Sebi regulations allow it take action against misleading advice only if the person giving the advice is an intermediary registered with it," says Vinay Chauhan, partner at Corporate Law Chambers in Mumbai.

In the past, the regulator has made a few attempts at going after bad advice. In November 2006, it slapped a fine of Rs20 lakh on Mathew Easow, a Kolkata broker, who had allegedly made personal gains by recommending investors buy stocks while he took contrary positions. Mathew appealed to the Securities and Appellate Tribunal on the ground that the regulator was using him to attack the electronic media—where his views were aired. His appeal is pending.

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