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Business News/ Money / Calculators/  Either adviser, or distributor. Not both
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Either adviser, or distributor. Not both

Mutual fund distributors need to brace for Sebi's new regulations that could subject many of them to the same strict norms that apply to registered advisers

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In its board meeting on 23 September, the Securities and Exchange Board of India (Sebi) decided to bring out a consultation paper to re-look at who all qualify to be a Sebi-registered investor adviser (RIA). In short, it wants to widen the scope of the regulations and bring more distributors, who sell mutual funds, into the advisory business. Mint had reported on this on 19 September (https://bit.ly/2cQ0XJS ). Here’s what it means for you, the investor, who may run into one of them to seek investment advice.

At present, mutual fund distributors registered with the Association of Mutual Funds of India, are exempt from seeking registration as RIAs. There are other exemptions.

Insurance agents who are registered with the Insurance Regulatory and Development Authority of India, pension advisers registered with the Pension Fund Regulatory Authority of India and such other individual product sellers registered with their respective regulators are exempt. But once a distributor starts selling multiple products, she has to get registered with Sebi under the guidelines for RIAs.

An RIA licence entails rigorous housekeeping by advisers. These include: segregation of advisory and distribution businesses, risk profiling of clients before suggesting products, appointment of a compliance officer, regular audit of books and detailed disclosures of commissions received from product manufacturers. Thus, many distributors (individuals and firms) have chosen not to become RIAs.

Apart from some distributors showing reluctance to take on a larger fiduciary role to become advisers, the advisory model itself is a deterrent for many. “The advisory business on its own is not a viable business, because people are not ready to pay a fee to their advisers. Clients don’t pay enough to compensate distributors for stopping the distribution business completely. It is somewhat a psychological issue and over time, as people become more comfortable with a purely advisory model, more people will become advisers and charge their clients for a valuable service," says Sandeep Parekh, founder, Finsec Law Advisors.

Three years after the investment adviser regulations were issued (January 2013), only 512 licences (both individuals and firms) have been issued, while there are almost 10,000 active distributors, and almost 70,000 overall. Now, Sebi is reconsidering its decision to re-look the exemption that mutual fund distributors have. Does that mean there won’t be any distributors left? And that all mutual fund distributors will become Sebi-registered advisers?

Vijay Venkatram, managing director, WealthForum e-zine, a platform that talks about issues and ideas that impact the mutual fund distribution community, says that there are broadly three types of distributors: one who don’t give any advice and just do the form submissions; two, who sell only mutual funds and give advice; and third, the ones who gives financial advice across products and charge a fee. “It appears that Sebi will target the middle distributor. At present, the distributor who sells only mutual funds and also gives advice is exempt because she sells only mutual funds. The advice she gives is just incidental to her overall activity," says Venkatram.

An issue that appear to be troubling Sebi is the way the term ‘investment adviser’ is loosely used by distributors and financial planners, who are not RIAs. “The term ‘financial adviser’ is used even by distributors. What the regulations prevent is the use of the term ‘investment advisory’ and ‘investment adviser’," says Sadique Neelgund, founder, Network FP, a firm that trains aspiring financial planners.

Earlier this month, Mint did a simple Web search for the words ‘financial adviser, ‘investment adviser’, ‘financial planner’ across Mumbai, Delhi and Bengaluru. The idea was to mimic the way retail investors would search for financial planners. We took a sample of about 10 such advisers and checked their websites to see the product offering. We checked if those who put themselves out as advisers are registered with Sebi as RIAs.

Delhi-based Elite Wealth Advisors Ltd lists equity and derivatives, commodity, currency, portfolio management, financial planning and real estate under its ‘products & services’ section. It also offers advice on the National Pension System. When we asked its compliance officer Sanjay Dutt Sharma why the firm doesn’t yet have an RIA licence, he said: “We are registered under Sebi (Research Analysts) Regulations, 2014 and Sebi (Portfolio Managers) Regulations, 1993. All the products I offer are covered under various regulations I comply with, so I don’t need a separate RIA licence."

Wealthhunterindia Pvt. Ltd, another Delhi-based financial services firm has insurance, mutual funds, equity, bonds, real estate and loans listed as products on its website, apart from financial planning. It is not an RIA. “We are in the process of registering with Sebi," said its spokesperson Alok Kumar. He stresses that the firm is actively considering applying for the RIA licence and is in the process of creating a separately identifiable division that overlooks the advisory function.

A Bengaluru-based distributor we got in touch with—and whose website made him out to be a financial planner—removed the words ‘financial planning’ and ‘wealth management’ from his firm’s website within 24 hours of realising that he could be on the wrong side of Sebi’s guidelines.

Once Sebi releases the consultation paper, it will seek public feedback. Distributors will get 3 years to comply with the RIA guidelines. While we await finer details of Sebi’s plan, the line between an adviser and distributor is set to get much sharper than what it is right now.

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Published: 29 Sep 2016, 04:12 PM IST
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