Won’t it be comforting for you to know that the person who handles your money and advises on your investments has some sort of official endorsement to do so? That she means business and is not there to misguide you? The road to that is already getting paved.

Ever since the Securities and Exchange Board of India (Sebi) Investment Adviser Regulations, 2013—the set of guidelines that will govern advisers—came about eight months back, 11 individuals and firms have registered themselves as investment advisers with Sebi, the capital market regulator, as of 28 August. That’s a tiny army for now but financial planners across India are watching it very closely.

Mint Money spoke to a few of those who got their licenses to get a sense of what they are up to and are they really different from other financial planners and distributors.

Earn from the investor, not the fund house

The biggest condition for getting Sebi’s license is that they will earn fees only from you, the investor. They are not allowed to get commissions from fund houses.

No commission means that they would just advise and won’t sell you any financial instruments. You would have to buy your financial instrument, as per their advice, on your own.

Mumbai-based adviser Kavitha Menon said that after advising, she simply tells her clients to invest in mutual funds (MFs) through the newly-introduced “direct" plan. “I just call up the fund house to get in touch with my clients and they take over. It works very well," said Menon. The direct plan is a low-cost plan (without the distributor’s commission embedded in it) that all MF schemes are now mandated to offer, in addition to the regular plans.

For Menon, this is not a problem as she started her own practice only in January 2013. But for those who have been in this business for a long time—advising as well as helping clients to invest—this could be a problem.

Hyderabad-based M.S. Shabbir, 60, had been doing both—advising his clients to invest in financial instruments as well as facilitating them to invest by doubling up as a distributor of MF schemes—since August 2006 when he started his firm, Sensage Financial Services Ltd. Having worked in the Gulf across Saudi Arabia, Oman and Qatar for about 20 years—where he also helped non-resident investors invest in India—Shabbir returned to India to set up his own advisory firm. He also distributed MFs if his clients wanted.

So when Sebi mandated that investment advisers should maintain an arm’s length between their advisory and distribution businesses, Shabbir made his daughter Lubha— who was already working with him—in charge of the advisory business. Meanwhile, Shabbir is in charge of the firm’s distribution business.

“The two arms co-exist to give convenience to investors, because after advice what? The client needs handholding and will need to eventually invest," said Shabbir. He, however, added that the choice to choose the distributor lies with the clients in keeping with what the regulations mandate.

Can arm’s length be maintained?

That’s the big question many financial planners are asking. Although Sebi has obviated the need to set up another company if you are already a distributor of financial products, it does mandate a “separately identifiable department or division" to look after the advisory function.

This, according to many financial planners, including Shabbir, means that they could ask their family members to look after one division, say distribution.

“This is not in true spirit. How can you maintain an arm’s length if your family member heads that other division? The Sebi investor adviser guidelines has no definition of arm’s length," said Gaurav Mashruwala, a Mumbai-based financial planner.

Shabbir added: “Yes, the regulator has not defined an arm’s length. That’s open for interpretation, we must ensure that the spirit of regulation is maintained. Sebi approved our arrangement."

Suresh Sadagopan, another Mumbai-based financial planner, claims to have gone one step further. He has bifurcated his existing distribution and financial planning businesses into two separate firms and not just separate divisions.

He applied to Sebi for a license last Friday. He said that the distribution business will be under his father, who “is a financial professional and is a cost accountant", but it will be a different firm with a different set of accounting books, bank accounts and a different office.

Keeping costs in check

Setting up a financial advisory firm may not be that costly, but maintaining and running it, can incur high costs. Advisers are supposed to store and preserve all written or oral records like telephone conversations and emails with their clients for at least five years.

If the investment adviser is a corporate body or a partnership firm, a full-time compliance officer is a must. All investment advisers are mandated to be audited once a year.

Navi Mumbai-based investment adviser Prakash Praharaj, 56, feels the pinch as he tells us how he has come to terms with the fact that he might not break-even before another two to three years. He said: “I have to pay rent and salary to my employees. Besides, the cost of compliance and record-keeping is also high."

Having worked in a life insurance company before, he has seen mis-selling up and close. That, he says, inspired him to take investment advisory more seriously.

“I have seen how some insurance agents have misguided their clients by getting them to buy policies they don’t need. Many of those investors are still suffering. I feel this country needs genuine investment advisers who will not push products. Genuine advice is the need of the hour. After I advise my clients, I tell them to buy insurance policies online and MF schemes directly," said Praharaj.

Gurgaon-based investment adviser Amit Kukreja says that computer software tools are a significant part of an adviser’s cost structure. “Software used to do risk profiling, to track mutual funds and customer relationship management (CRM) are necessary infrastructure and advisers must invest in these," he said.

Menon feels it’s “not all that expensive". She says there is ample number of CRM software available in the market that help keep tab on emails that she exchanges with her clients. Emails exchanged with clients get stored and classified adequately in such CRM software that can later be looked into if a trail needs to be established. Menon and Praharaj also ensure that each phone call gets followed up by an email that summarizes the conversation; emails are then stored. Computer skills like the use of Microsoft Excel are an added advantage, says Menon.

“Infrastructure investment is not a big constraint. Such an investment is important for the success of advisory practice... although there are ways to do them in very economical ways. Yes the effort and time to maintain documents and records will go up drastically. But advisers should learn the skill of using them to increase efficiency and effectiveness of practice... this way the efforts will have quantitative pay off," says Sadique Neelgund, a certified financial planner and founder, Network FP, a firm that trains aspiring financial planners.

Are investors willing to pay?

Here’s where the advisory community is divided. Praharaj says that Indian investors are not used to paying for services. “I have known educated people like general managers at big companies tell me that if they go to an insurance agent or a MF distributor, he can buy a product without paying any fees, so why should they pay me," he adds.

However, Kukreja has a different story. “I have seen many corporate employees becoming more and more open to getting advisory services for a fee rather than someone approaching them to sell a product. Most of them have gone through a bad experience and have been a victim of mis-selling. The Sebi license gives some sort of legitimacy to our profession, which is good," says Kukreja.

Menon says that even if not many customers value fee-based advice, eventually people will warm up to licensed advisers once the awareness spreads.

“Last week I met this potential client for the first time and he asked me ‘Are you registered with Sebi?’ I was pleasantly surprised but very gladly told him ‘yes I am’," said Menon.

Menon was fortunate to come across such an investor. Whether more investors warm up to the idea of licensed advisers or not, only time will tell.

Investment advisers, on their part, are hoping it would happen sooner than later.

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