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Sebi tightens norms for advisers, restricts use of terms like IFAs


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, Sebi 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.

Client segregation

Sebi has mandated client-level segregation of distribution and advice, which means 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 restrict 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 arm’s 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

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. This has elicited some opposition from industry professionals. “The 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.

The regulator has also made it mandatory for an individual RIA with more than 150 clients to move on to the corporate status.

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 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.

The Sebi notification has barred anyone other than RIAs from using terms like IFAs and wealth advisers to describe themselves.

Advisory fee

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.

Some RIAs have minimum thresholds of net-worth before they accept individuals as fee-only clients, while others have minimum fee amounts. “We do not have a minimum net-worth criterion but we have a minimum fee. Some customers may compare the fee with the assets and decide that it is not viable for them,” said an RIA, on the condition of anonymity. The RIA added that he may have to change the structure of his business to a corporate set-up due to the new regulations, a transition that increases the capital required from 5 lakh to 50 lakh.

Mint take

The Sebi notification will raise advisory standards in the industry and the restriction on the nomenclature will help consumers identify who they are dealing with though a lot depends on the enforcement of this provision.

Regardless of what Sebi specifies for fees, the regulations on minimum qualifications could push up costs and make advice unaffordable for some people. The weak consumer sentiment due to covid-19 may temporarily hold costs down, but these are eventually likely to move up as the industry will be forced to hire more expensive talent. Apart from the qualification norms, the prohibition on distribution services may also push up fees.

The notification will also widen the gap between regulations for advisers and distributors. At present, there are only about 1,400 RIAs compared with more than 100,000 MF distributors who can also offer incidental advice.

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