DYK: The benefits that advisory regulations offer
2 min read . Updated: 26 Dec 2013, 06:40 PM IST
PremiumA Sebi-registered adviser cannot receive any compensation from anyone other than the client
How does one know if the person selling mutual funds (MFs) is trustworthy? How good is the advice? Till recently all that an investor could rely on was her own intuition, the agent’s integrity or word of mouth. But this changed when the Securities and Exchange Board of India (Sebi) brought out the Sebi (Investment Advisers) Regulations, 2013 regarding registered and regulated advisers. An agent or a distributor primarily represents the firm whose products she sells. But in the past few years, some distributors have graduated from being just agents to being advisers who take a comprehensive look at the financial plan and long-term investment objectives before recommending MF schemes.
Sebi’s new regulations target these advisers so that the consumer gets the best possible services and there is no clash of interest. Here are two areas where you stand to gain:
Comprehensive and unbiased approach
The guidelines define that a Sebi-registered adviser cannot receive any compensation from anyone other than the client in any form. If the adviser sells MF schemes and earns commissions from fund houses, that business must be segregated into a separate division. You will not be obliged to buy schemes recommended from this division. It is also mandatory for the adviser to gather certain relevant information—objective of investment, existing investments across assets, and other such details—from you for the purpose of giving advice. The adviser needs to do a proper risk profiling to ensure that you will be able to accept the level of risk embedded in the products being recommended. The adviser may use a questionnaire or any other suitable tool to do this. You will see the results so that you can make an informed choice. The adviser has to make sure that she recommends suitable products based on your needs and risk capacity.
Transparency
At the outset of an association, the adviser has to make a disclosure to you about any conflicting activities that she may be involved in, like distribution of financial products, that may potentially cause a conflict of interest in context of the advice given to you. The adviser also needs to tell you about any personal holdings that may go against the recommendation given to you. Your adviser also has to maintain records of interactions, including the risk profiling and recommendations given for a period of at least five years. Sebi can audit these records from time to time.
There are, however, certain professionals who are specifically exempt from this regulation. These include your chartered account, stock broker, insurance agent, MF agent and your independent adviser, too, if the fees she earns from selling products far outweighs the fees she earns from the advisory work.
