Can A SEBI Registered Investment Adviser Charge Performance Based Fees?

One of the most puzzling aspects of an investment adviser’s work is “how much fee should be charged to the client”.

I write about various topics related to SEBI (Investment Advisers) Regulations, 2013 and this is one of the most common queries I get.

It is a fair question specially in the Indian context where paying fee for advice is still in its nascent stage.

Recently, one of my readers, Rahul (name changed) wrote to me.

Some background:

Rahul is planning to apply for Investment Adviser license as an individual. His services including preparing a financial plan and ensuring that the investments of the clients are executed in line with their financial plan. He recommends equity stocks and mutual funds. He wants to charge fees for his advice as well as ongoing execution and support.

The questions on his mind are

“How much fees can I charge to the client? Is there any limit specified by SEBI? Can I charge performance-based fees?”

Here is my reply to him:

#1 – How much fees can you charge?

So far, SEBI has not specified any limit  on the fees to be charged to the client. It has left the decision to the Investment Adviser. SEBI just wants the Advisor to ensure that the fee is fair and reasonable.

This is indicated in the Clause 6 of Third Schedule of the Regulations is the Code of Conduct for Investment Adviser.

Clause 6 is on “Fair and Reasonable Charges”, says:

“An investment adviser advising a client may charge fees, subject to any ceiling as may be specified by the Board, if any. The investment adviser shall ensure that fees charged to the clients is fair and reasonable.”

To understand this better, let’s look at an instance where SEBI has issued an order against CapitalVia Global Research Ltd., a registered Investment Adviser. In the order, SEBI has mentioned that the reasonable charges should ensure that even small and medium sized investors have access to financial markets. The fees should not create unrealistic high expectations for investors. The fees should be based on the advice rendered in terms of reliability, duration of the advice, accuracy and suitability and not in terms of the expected returns to the client. 

So, it is recommended to have a ‘fee-matrix’ which indicates the fees to be charged and the services to be rendered by the Investment Adviser.

Read more: SEBI Strikes Investment Advisers

#2 – Can you charge performance based fees?

What is performance based fees?

It is a fee based on percentage of performance of investments advised by an IA or a share of capital gains or capital appreciation.

SEBI is clear with the scope of Investment Advisers. The job of an Investment Adviser is to provide advice on securities suitable to client’s risk profile and financial goals. It cannot provide distribution or brokerage services. An adviser can charge fees for his advice. The fees can be flat fee or a percentage of the assets under management.

However, in my view, this clearly rules out any performance-based fees.

The rationale is not too far to seek. In case of performance-based fees, an investment adviser may advice more risky financial products to earn higher fees.

SEBI wants advisers to charge reasonable fees so that even a small and retail investor can take up advisory services. If an adviser charges performance-based fees, he is likely to attract only clients with large portfolios or HNIs.

As per SEBI, an Investment Adviser has a fiduciary duty towards its clients.  Hence, the fee of the adviser cannot be conditional on meeting a threshold of performance.

If we were to look at another regulator such as the U.S. Securities and Exchange Commission (SEC), it has allowed the Investment Advisers in U.S. 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 can charge performance-based fees to clients with higher amounts of investments. However, that is in US.

In India, SEBI has allowed Portfolio Managers (those who offer PMS services) to charge performance -based fees to their clients. As per PMS regulations, the minimum investment requirement from a client is Rs. 25 lakhs.

In conclusion, an Investment Adviser, currently at least, cannot charge performance-based fees in India. However, s/he is free to charge a fee based on AUM or assets under management.

Hope this helps you understand how you can charge fees to your clients.