Can a Research Analyst provide model portfolio services?

I have been asked this multiple times by the advisers and my answer has always been “NO!”

I have been saying this since 2016. Here is what I have mentioned in one of my old articles here.

What are the main reasons?

1. There is no buy / sell recommendation on a specific security
2. Advice on a “portfolio of securities” is covered under Investment Advisers Regulations and not under research analyst regulations

Finally! Yes finally, SEBI has proved that my interpretation is correct.

SEBI passed a settlement order against Amit Mohan Jeswani (Proprietor of Stallion Asset) – Research Analyst on May 6, 2022. Click here to read the order.

One of the allegations mentioned in the order:

It was observed that being a Research Analyst, the Applicant was selling model portfolio products to his clients / prospective clients which is against the defined responsibility of a Research Analyst as mentioned in RA Regulations and professional standards of Research Analyst.

It was therefore alleged that the Applicant violated provisions of Regulation 2(u) read with clause 1, 2 & 8 of Schedule Ill of Code of Conduct prescribed under the RA Regulations.

What was Stallion Asset doing?

SEBI in its show cause notice (SCN) issued against Amit Jeswani on May 4, 2021 mentioned that it observed that Stallion Asset was offering two products as model portfolios with 10-20 stocks and 7-10 stocks in the portfolio respectively where the customer has to simply follow the Model Portfolio. It was also giving allocation of weights.

SEBI also in its SCN mentioned that providing model portfolios to the clients / prospective clients is against the defined responsibility of a Research Analyst.

This is what SEBI mentioned:

1. The said activity was considered to be like that of a portfolio manager where the portfolio manager advised the client about management or administration of a portfolio of securities.
2. The Research Analyst was not giving an option to the investors to invest in specific security / script as the recommendations are portfolio based and not stock specific.

So, the job of a Research Analyst is to give recommendations on a specific stock and not a portfolio of securities.

But then, who can give model portfolios?

First let us understand what is a model portfolio.

From the SCN we can understand that “model portfolio” means a portfolio of securities with allocation of weights where clients can simply follow the portfolio.

Portfolio of securities means portfolio of stocks or mutual funds or a mixture of both.

The SEBI registered Investment Advisers (RIAs) can give model portfolios. Of course, subject to the compliance of SEBI regulations.

How can I be so sure?

Let’s look at the definition of “investment advice” under RIA regulations:

“Investment advice” means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on an investment portfolio containing securities or investment products……”

Here, it is clearly mentioned that advice on a portfolio of securities is investment advice. Hence providing model portfolios get covered under RIA regulations.

Can PMS also provide model portfolios?

In my view yes, they can provide model portfolios subject to compliance of PMS regulations. This also means that the client should invest at least Rs. 50 lacs.

What will happen to existing Research Analysts providing model portfolios?

The answer is obvious that they need to change the product offering and not offer portfolios. They can provide buy / sell recommendations on a specific security where clients can decide the action on that specific security.

Will SEBI take action on such Research Analysts?

Your guess is as good as mine.

However, in my view, Research Analysts should stop taking new clients under the model portfolio product as well as not renew any subscriptions. They should complete all their obligations and stop the services.

Finally, SEBI has given clarity on what Research Analysts and RIAs can and cannot do.

And your job is to follow the compliance of the regulations under which you are registered.