The Securities and Exchange Board of India (Sebi) has brought in a slew of regulations governing registered investment advisers (RIAs), through a notification issued on 3 July. Many of these changes were proposed by the capital markets regulator in a discussion paper issued in January 2020.
Sebi has introduced client-level segregation and barred providers from offering advice and distribution services to the same client, besides increasing net-worth requirements and tightening experience and qualification standards for RIAs and their employees. It has also introduced a mandatory threshold for corporatization.
However, the regulator has skirted the thorny issue of the quantum and manner of charging RIA fees. Sebi has also stopped non-RIAs from using terms like wealth adviser or independent financial adviser (IFA) to describe themselves.
Here are the details.
The first change in the Sebi rules is the client-level segregation of distribution and advice. A provider cannot offer both paid distribution and advice to the same client.
For corporate RIAs, the prohibition includes a bar on group entities such as subsidiaries offering paid distribution to an advisory client.
RIAs can provide execution services, but they have to be free of cost and in direct plans. Some products such as alternate investment funds (AIFs) do not have direct plans but Sebi introduced the concept of direct plans in others like portfolio management services in February 2020.
“Earlier many corporate RIA firms at the high end would charge superficially low fees but would offer in-house products or products from their associated distribution arms like PMS and AIF or do start-up equity placements and rake in high commissions. The new rules will stop this practice,” said a senior industry professional, who declined to be named.
However some experts feel that the new rules stop individual RIAs from accepting distribution clients completely.
“The new rules were supposed to bring in parity between individual and corporate RIAs. But a plain reading of them shows that individual RIAs cannot accept even non-advisory clients as distribution clients, while a corporate can do so through a separate division at arms’ length,” said Suresh Sadagopan, founder, Ladder7 Financial Advisories, a financial planning firm. “However the family of an individual RIA can provide distribution to an entirely separate set of clients,” he added.
Changes for advisers
Second, Sebi has also hiked the net-worth requirement for individual advisers from ₹1 lakh to ₹5 lakh and for corporate RIAs from ₹25 lakh to ₹50 lakh. It is also mandatory for an individual RIA with more than 150 clients to move on to the corporate status.
This has also elicited some opposition from industry professionals. “The net-worth requirement for individuals at ₹5 lakh is absent in professions such as law, medicine and chartered accountancy,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.
With regard to fees, a Sebi discussion paper, issued in January 2020, had proposed that RIAs either charge a fixed fee of ₹75,000 per client family or an assets under advice-based (AuA-based) based fee capped at 2.5% of the AuA. The Sebi notification did not include this proposal, merely saying that the fees will be as specified by the regulator.
The Sebi notification also said that the principal officer of a corporate RIA or an individual RIA must have a post-graduate degree in specific subjects and five years of work experience relating to advice in financial products or securities or fund or portfolio management. Even an employee associated with investment advice should have such a post-graduate degree or qualification and two years of experience.
“People with post-graduate qualifications and two years experience will demand a salary which most people in the industry cannot afford. Moreover, how can those who are not qualified build experience, if experience itself is a requirement for employment with an RIA?” asked Sadagopan.
Finally, the SEBI notification barred anyone other than RIAs from using terms like IFAs and wealth advisers to describe themselves.
The Sebi notification will raise advisory standards in the industry but will widen the gap between regulations for advisers and distributors. At present, there are only about 1,400 RIAs compared to more than 100,000 mutual fund distributors who can also offer incidental advice.
The restriction on the nomenclature can help consumers identify who they are dealing with but much depends on the enforcement of this provision.