Accredited Investors solve a big concern for RIAs

It is quite unusual for someone to call me at 9 pm, without sending a message first. But here it was – a client.

Before I could say “Hello”, the voice from the other side said – “Did you see today’s SEBI circular?”

“Why, what happened?”

Quick response – “If I am reading it right, I can finally have a profit share arrangement with my clients, as a RIA.”

For a very long time, the FAQ I have got is “Can I charge performance fees? My client is okay with that.”

No one can doubt the logic of the arrangement. It clearly is aligned with the outcome, especially for those who invest in/manage market linked investments.

My standard response used to be, “I agree with SEBI on this, since the role of the advisor is only to provide advice and not manage the money of the clients.

One, you cannot have POAs or authorization letters for placing trades in your clients’ accounts. How will you ensure that the trades are placed at the right time as per your advice?

Two, in case of performance-based fees, an investment adviser may advise more risky financial products to earn higher fees. The fee of the adviser cannot be conditional on meeting a threshold of performance. You are free to charge fees on the basis of assets under advice.”.

Well, looks like that is about to change, courtesy the latest circular by SEBI for RIAs on Investment Advisory Services for Accredited Investors.

Wait, is this conditional?

Yes, it is applicable to only the Accredited Investors.

What is an Accredited Investor?

SEBI introduced the concept of accredited investors through the consultation paper in March 2021.

Later in August 2021, SEBI came out with amendments to Investment Advisers, PMS and AIF regulations to include the definition of “Accredited Investors”.

The concept of accredited investor is not new to the global markets. The US SEC does have a concept of “Qualified Clients”, similar to Accredited Investors.

Accredited Investors are investors categorised as such based on their financial capacity, generally ascertained from their income and/ or net  worth. Their financial  capacity gives  them  an ability to absorb loss and thus relatively higher risk products may also be suitable for such investors.

As per the SEBI consultation paper, these investors are sophisticated enough to not require extensive regulatory protection, and therefore, issuers of securities  and providers of financial  /  securities  market  products / services are offered  a regulation-light  regime, to offer their  products /  services to these investors.

As per the definition provided by SEBI in the AIF and IA regulations, Accredited Investor means any person who is granted a certificate of accreditation by an accreditation agency who has:

1. An annual income of at least Rs. 2 crores; or
2. Net worth of at least Rs. 7.50 crores, out of which not less than Rs. 3.75 crores is in the form of financial assets; or
3. An annual income of at least Rs. 1 crore and minimum net worth of Rs. 5 crores, out of which not less than Rs. 2.50 crores is in the form of financial assets.

The same eligibility conditions are applicable to Hindu Undivided Families (HUFs), family trust and sole proprietorships.

For non-individuals:

In fact, if we were to look at another regulator – the U.S. Securities and Exchange Commission (SEC), it has allowed the Investment Advisers to charge performance based fees to “Qualified Clients” on the following conditions :

• The client must have assets under management of $1 million

Or

• The client must have a net worth of more than $2.1 million

This clearly states that an Investment Adviser in the US can charge performance-based fees to clients with higher amounts of investments.

So, can RIAs in India charge performance fees?

That seems to be the case now! As per the latest circular, SEBI has removed the limits and modes of fees payable to the IA by Accredited Investors. Both the investor and the advisor can mutually negotiate fee and payment.

This means you can work on a performance fee basis with an Accredited Investor.

However, you should bear in mind that you cannot manage the account of a client like a discretionary PMS and place trades in your client’s account.

You cannot access a client’s accounts or holdings for offering advice.

The next question then is how to become an accredited investor?

SEBI has granted recognition to BSE Administration and Supervision Ltd. (BASL), a wholly owned subsidiary of BSE Ltd., to act and carry out the activities as an Accreditation Agency.

Any investor who wants to get the certificate has to submit an application on the BASL portal.

The investor has to create her account on the portal. On completion of the login registration process, the investor has to update the details and upload their self-attested documents required for obtaining Accredited Investor Certificate along with payment of fee.

Here is the SOP document for Accredited Investors.

Here is the user manual for BASL portal.

Can I as an RIA check the status of my client as an Accredited Investor?

Yes. Investment Providers viz. Alternate Investment Funds (AIF), Portfolio Management Fund (PMS) and Registered Investment Advisers (RIA) will be provided a fee-based access to the BASL portal for verification of certification status of the Accredited investors.

Here is the SOP document for the investment providers.

Along with the definition of Accredited Investor, SEBI has also added the definition of “large value accredited investor” for AIFs and PMS. The large value accredited investors enjoy more privileges than the accredited investors. I will cover this in my upcoming posts.

For RIA, please note that the restrictions for the limits and modes of fees payable by the clients are not applicable to accredited investors. Other compliance requirements will apply even to accredited investors.

So, here is a tip from me.

While you rejoice on the change, remember that when servicing an Accredited Investor, get your agreement right.

It must have all the necessary clauses in especially mentioning that the client is an Accredited Investor as well the modalities of fees charged.