With the background of SEBI’s recent consultation paper on framework for Investment Adviser, I had an intense conversation with a friend who is also an individual SEBI Registered Investment Adviser.
Since 2015, he has seen the waves of change through the three consultation papers for RIAs in 2016, 2017, 2018 and of course, the big bombshell in 2020 as well, which restricted RIAs in several ways.
And now the unbelievable relaxations consultation paper of 2024.
“Kruti, what is SEBI exactly trying to do with RIAs?” This is before he even said “hello”.
I smiled as I am sure this will be the question of all RIAs and all those who want to become RIA since 2020.
“Should I just close down my financial planning service? At least that’s what it looks like. Please help me understand this.”
I knew where this was coming from. Some historical context here –
Before 2013, the financial planners were not regulated. With the introduction of the IA regulations and the inclusion of financial planning in the definition of “investment advice”, the financial planners came under the IA regulations and in turn under the SEBI purview.
As per the IA regulations, “financial planning” shall include analysis of clients’ current financial situation, identification of their financial goals, and developing and recommending financial strategies to realise such goals.
And now, in the consultation paper, SEBI has segregated financial planning and investment advisory services.
That is what has got my friend unhinged.
“Kruti, the consultation paper says, I can provide financial planning on broad allocation of different asset classes and other legally permitted asset classes. Now what are “legally” permitted asset classes? No one wants to do illegal business here.”
I explained, “SEBI has not clearly specified the asset classes. But want I understand is you can include asset classes which are not regulated by SEBI but are included as assets in clients’ portfolio like real estate, commodities – gold / silver, insurance, art collectibles, banking products.”
“So, you mean, I can suggest investments in crypto currency?”
“Though Crypto currency investments are not illegal in India, they are still not regulated by any regulator. I am still not sure if that will be permitted.”
“Got it! Then SEBI says I can provide investment advice on instruments which are under the purview of SEBI or investment products that are under the regulatory purview of other financial sector regulators. What does this mean?”
“Investment advice means specifying names of a particular stock or mutual fund. Stocks, mutual funds, bonds, debentures, derivatives, PMS and AIF – they all come under SEBI’s regulatory purview. Then there are other investment products like insurance, banking products, retirement products which come under IRDA, RBI and PFRDA respectively. You can also provide advice on these products.”
“Okay, what about foreign stocks, foreign real estate? My clients are working in foreign companies and have ESOPs or RSUs. Can I advise on them as well?
“Unfortunately, SEBI says that an individual IA cannot provide advice in respect of instruments / products or provide service related to an asset class other than those under the purview of SEBI or other financial regulators.”
“But foreign stocks are regulated by regulators of that country and it is definitely not illegal.”
“Yes, I agree. But as per the consultation paper, any advice in respect of instruments/products or services other than securities under purview of SEBI or investment products under the regulatory purview of other financial sector regulators shall not come under the purview of the IA Regulations.
As per the definition of investment advice in IA regulations, “investment advice” means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products.
But it looks like advice on commodities or foreign stocks will not come IA purview.”
“But isn’t it contradicting the definition of investment advice as well?”
“Yes. Investment advice includes advice on investment products. But the current regulations do not define what are investment products or financial products. With the consultation paper, SEBI intent is to include only those financial products which are regulated by other financial regulators in India.”
“Do you think this is fair? Doesn’t SEBI understand that when we provide financial planning services, we give a holistic view about the entire financial situation of the clients? Clients diversify their investments in various asset classes for various reasons including risk mitigation”.
I could sense his frustration.
“What about unlisted securities in India? Are they included under the purview of IA Regulations?”
“That’s a good question. Unlisted securities are also investment products and come under the purview of Ministry of Corporate Affairs (MCA). However, in my view, even unlisted securities will also not come under IA regulations as there are no regulations for them and in case of any grievance, I am not sure if MCA will look into the affairs of investment advisers.
I think, SEBI will come out with some clarification on the same.”
“I hope SEBI considers these points. Investment advice is a part of financial planning. Along with the plan, clients also want to know where to invest or what to do with their current investments. If we go by the consultation paper, should I tell my clients, I will not advice on foreign securities? Do I give up my financial planning practice? There has to be a solution to this.”
“I understand, it is difficult for individuals. From the consultation paper it is clearly coming out that SEBI does not want unregulated products and services under the IA purview.
Non-individual IA can provide advice in respect of an instrument / product or provide service related to an asset class outside of SEBI or other financial regulators’ purview. But the catch is, it can be done only through a separate legal entity having a different legal and different brand name.”
“Can I continue as individual RIA and then have another entity to provide services for unregulated products?”
“No, I don’t think that is the intention of SEBI. An an individual RIA cannot be a director in any other company.”
“Tell me this. As an RIA, can I only provide RIA services? I understand that SEBI does not want unregulated products and services under the IA purview. What if I comply with IA regulations for regulated products and for unregulated products, I have a different agreement and charge my clients separately?”
“No, I don’t think that is SEBI’s intention. As an RIA, you can only provide RIA services. But yes, as a non-individual RIA, you can provide other services.”
“Do you mean now I should get registered as a non-individual and then again have another entity to provide advice on other asset classes?
“Well, I think, that’s what SEBI wants.”
I could see ripples of confusion, frustration and perplexion riding across his face.
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SEBI’s consultation paper has thrown financial planners and advisers advising on other products in a fix.
While SEBI says IA can provide financial planning services on broad allocation of different asset classes, SEBI has also shown concerns on IAs are also providing other/ ancillary services such as estate planning, tax planning, etc.
SEBI should seriously consider the way actual practice happens and address the concerns of the RIAs.
SEBI’s consultation paper is open for comments till August 26, 2024. If you have a view on the paper, do send your comments to SEBI.
Which proposed changes will see the light of the day, we have to wait and watch.
Hi kruti
In recent consultation paper they mentioned RA can provide buy sell recomendations by doing only kyc also it mentioned this one(If the trading call is provided without any risk profiling of the client and product suitability assessment, such trading calls are on “one to many” basis and shall come under the purview of RA Regulations ) My doubt is what does one-many basis means?
IS it thta RA can provide nifty/banknifty recomendation for individual clients with out risk profiling?
kindly clarify
Thanks
Hi. One – to – many means that you are providing same recommendations to all the subscribers who have subscribed to your service and are not providing any personalized or cutomised services.
As a RA, conducting risk profiling is not required.
What about algo trading software company providing SaaS to clients? Clients allow the software to place buy sell trades in their trading account by providing their login credential in the software. The company charges a monthly fixed fee and a variable fee based on profits. Is there any registration required with SEBI?
Algo advisory or algo trading is still a grey area and SEBI has not provided any clarification regarding this.
Hi Kruti, does the 2024 consultation paper also propose to relax the eligibility criteria for RIAs from requiring to have PG to just holding any undergrad degree? Also, as far as the experience requirement is concerned, is experience in stock markets as an individual independent trader/investor something that SEBI can consider for granting RIA licence? If not, what could an individual trader with stock market knowledge do to comply with the experience requirement, if they have intent of also advising clients?
Hi Rahul, yes, one of the proposed changes includes relaxation in eligibility criteria for qualification. It is proposed to reduce the requirement to graduation or post-graduation in specified fields and removal of experience requirement. If one does not have graduate degree in the specified fields, one can enroll for a course which will give them post-graduate degree / diploma in specified fields.
Insurance is not an investment product. Similarly loan is not an investment product. Chit is an investment as well as a loan product.
Over the period SEBI has made the rules for stock brokers also applicable to RIAs that make RIA business difficult. The consultation paper does not addresses such draconian rules.