On the evening of Jan 16, 2020, lots of messaging groups erupted against a new consultation paper from SEBI on the proposed changes to the RIA regulations.
This is the 4th consultation paper issued by SEBI in the past 3 years. There was no action by SEBI on the last three, except a recent issue of few measures to strengthen the conduct of IAs.
SEBI IA Regulations were originally issued in Jan 2013, 7 years ago, with an aim to create a regulatory framework to make fee based advice the norm.
The result – far from it!
This is what has happened till now.
- Only 1300 odd IAs have registered so far. Over half of them are stock advisors and stock tips providers. The latter have resulted in almost 100% of the complaints from investors.
- Just a handful of the mutual fund distributors (there are more than 50,000 of them) have signed up under RIA.
This is SEBI’s primary concern and drives its proposals.
In my view, there are 2 big goals that SEBI seems to be aiming for with this consultation paper.
- Greater control on the ‘stock tips’ providers, more so, on fees and compliance
- Get more distributors to adopt the RIA model, that is, create a transition path for MF distributors to become RIAs
Both of these fall under its overarching goal of ‘building an environment to promote fee based advise that ensures investor protection’.
While the intention is good, “good intentions alone are not enough”.
Let’s look at the proposals aimed at the stock tips providers.
#1 – Charging of fees by IAs:
SEBI has proposed that an Investment Adviser can charge fees either on basis of asset under advice (AUA) or a fixed fee. SEBI has also put a cap on fees to give an idea what is reasonable fees.
It is interesting to note here that SEBI has not included fees charged on profit sharing basis, which simply means that as an IA you cannot have “profit-sharing” arrangement with your clients.
This proposal intends to prevent instances where the stock tips provider charges fees equal to the amount invested.
#2 – Maintenance of records
SEBI has proposed that IAs should maintain records of all interactions with the client including prospective clients. These records include physical records written & signed by client, telephone recording, emails, SMS and any other legally verifiable record.
In SEBI’s view this will strengthen the process of handling complaints against IAs.
#3 – Qualification criteria
SEBI has enhanced the eligibility criteria to become an Investment Adviser.
SEBI has introduced the concept of “Principal Officer” for corporates who will be responsible for IA business.
To cover the employees of stock-tips providers, SEBI has also introduced definition of “persons associated with investment advice”. The definition includes sales staff or any such employee who faces the client.
SEBI has now proposed that an individual investment adviser, principal officer (for corporates) and persons associated with investment advice should have qualification as well as 5 years of relevant experience along with NISM certification.
One more notable change proposed is that SEBI has specified that professional course or post graduate degree or diploma course should be of minimum 2 years, which the current regulations do not specify.
#4 – Net worth requirements
SEBI has proposed a steep increase in the net worth for individual RIAs from Rs. 1 lakh to Rs. 10 lakhs. For non-individuals, the net worth is proposed to be increased from Rs. 25 lakhs to Rs. 50 lakhs.
Adding to this, SEBI has also proposed that an individual investment adviser having more than 150 clients or having asset under advice exceeding forty crore rupees, must compulsorily re-register as corporate investment adviser within 6 (six) months of the trigger event.
Since SEBI has focused more on the stock-tips providers, SEBI has proposed to enhance the net worth requirements as well as re-registration as corporate IA.
However, I am not sure why SEBI has insisted on re-registration as corporate. Since individuals can also provide execution services, there is no difference left between individuals and corporates RIAs. We will know this in the following section.
Let’s now look at the proposals for MF distributors and RIAs.
Given the limited success of adoption of the RIA model till date as compared to MFDs, SEBI’s intent seems to get more MFD in its fold and creating a glide path for them to fully adopt the RIA model.
One of the big steps, as proposed by SEBI, is that one can now be an MF distributor as well as an RIA.
While most people are interpreting it as a move to allow RIAs some relief, the real intention is different. This should encourage a lot of distributors to consider testing the waters of the RIA model and eventually many of them to move full fledged to it.
So, all RIAs can have distribution as well as advisory license at the same time. The caveat is that client level segregation of advisory and distribution activities has to be done.
It means that the same client cannot be accepted for both advisory and distribution services within the group of the non-individual entity and at family level for individuals.
Though this may be a welcome proposition as SEBI has acknowledged the concept of “one-stop shop” for RIAs, SEBI has not clarified whether RIAs have to comply with IA regulations for all clients or only advisory clients. Also, for distribution clients, how will the conflict of interest be addressed is a question mark.
Problem areas in the larger scheme of things:
- SEBI has not distinguished between RIAs, who are providers of traditional services like financial planning from stock tip providers or from individual RIAs to corporate RIAs. Most of the proposals are not practical for traditional RIAs. Based on these proposals, why will anyone opt for corporate license from the start?
- What SEBI has not realised is the conflict in its own recommendations, especially with regards to the individual RIA. On the one hand, SEBI wants MF distributors to adopt the RIA model, on the other hand, they want restriction in fees and no. of clients.
- SEBI has also not taken into consideration the part technology plays in the advisory services. With the use of technology, even individuals can service more clients than 150 clients. The best example is providing robo-advisory services.
- If RIA advises transaction in regular plans, how is he going to deal with conflict of interest in advising such products?
SEBI needs to look at the ground realities.
Multiple practice models exist for IAs–
- Investment Advisors (covering most asset classes, financial planning, asset allocation)
- Research Services Providers (advice on stocks on subscription fee basis)
- Stock tips providers
- Robo Advisors (automated tech driven service)
Each one has different business models and hence should have different compliance requirements. SEBI can take a leaf from its own playbook about risk profiling.
If No. 3 is where there is highest risk to investors, that is what should be tightly controlled.
Though SEBI has taken the first step to think about the problem areas, SEBI has to rethink and revamp the entire IA regulations.
It should aim to ultimately bring all IFAs, investment advisers, research analyst and MFDs under one ambit, under one regulation and have different chapters in the regulations for compliance requirements for each of them.
That should help it achieve its big goal of allowing investors to receive conflict free advice at a reasonable cost.
Hi Kruti,
I have MBA degree, NISM VIII, NISM IA XA & XB certifications. However, my 12 years experience is in IT companies with finance & Insurance clients . There is no direct experience in portfolio management firm.
Question is, will my 12 years experience in IT industry be considered valid for application or void?
Hi Aslam, have you advised clients during your experience with IT companies? What does your experience certificate mention? If you have experience in advising in financial products, SEBI will consider your experience.
Hi Kruti,
Thank you very much for the detailed article. I have been trading for the last 5 years in my personnel account. I hold Bsc(Maths),Msc(Maths) and M.Tech (computer science). Currently working as a software engineer…
I would like to offer the following services to the clients in addition to my software engineering job and would like to know regulatory requirements on this.
1) Offer service to do fund switching in ULIPS. (Unit linked insurance polices) and charge fee based on performance
2) Offer service to do fund switching in NPS (National pension scheme) and charge fee based on performance.
Can you please let me know on this and would like to take your help for fulfilling regulatory requirements.
Hi Prasad, I suggest you read my article – https://cskruti.com/should-i-register-with-sebi-as-investment-adviser-or-research-analyst/
Pls note that you can charge performance fees only if you are registered as a PMS with SEBI. If you want to have a detailed discussion on this, you can opt for my consultation services.
Thank you very much.
Basically i would like to offer fund switching service for ULIP (Unit linked insurance policies)funds. Earlier in one of the PMS thereads, you said that PMS cannot invest in insurance products, In that case how i can achieve charging performance fee on giving advice for ULIP funds?
Hi Prasad, I am not sure how advise on ULIPs be treated as insurance is currently not included in definition of “securities”.
Hi,
Thanks for exhaustive article on the subject. I am an MCA and understand that I my education qualification is not accepted by sebi for IA, Going forward I am planning to post graduate diploma in financial market practice(pgdfmp) 1 year from IGNOU, please let me know if the same is accepted by sebi as education qualification.
Hi Amit, the course needs to be of minimum 2 years.
Thanks, If I opt to do CMT from https://cmtassociation.org/chartered-market-technician/ do you think that is accepted by SEBI ?
Is CMT from a recognised foreign university or institution or association? If yes, then it will be accepted by SEBI. Best is to confirm with SEBI’s local / regional office near you.
If a person becomes RIA and his family provides execution services(sub-broker) of securities market to the RIA client. Is it inline with regulation ?
In my view, if the family is getting commissions, it will be against the RIA amendment regulations.
I am 70 year’s old man having experience of 40 year’s of stock market and since so many years working as Sub broker associate person now since 30 year’s.
My educational qualifications is under graduate up to B.Com how can I apply for IA or RA .?
I know technical since last 25 year’s
Please guide me
Hello. Now qualification requirement for Investment Advisers application is professional qualification / post graduate degree or diploma. For Research analyst application, qualification requirement is graduation plus 5 years of experience. You can apply for RA if you want to provide research services. Your registration as sub-broker for atleast 5 years will be counted as experience under SEBI RA regulations. Hope this helps.
In regard to annual compliance certificate from CA/CS is there any time limit stated and any format prescribed by the regulations…kindly advice
Hi Jagruti, SEBI had indicated time limit in the consultation paper, but there is nothing mentioned in the regulations yet. SEBI has also not prescribed any format of the certificate.
Hello, i am dealer with a broker for past 20 years but i am 12 pass i can applied for RIA or research analyst.
Hi Varun, minimum qualification requirement is graduation for RA and post graduation for RIAs.
Hi Kruti
I am an independant Life Insurance agent. Also planning to persue CFP. After completing CFP , can I continue to sell Insurance and Mutual funds on a commission based model ? Can CFP be avoid being Fee- based planner and take up Financial planning service + Insurance / Mutual fund selling ?
Hi. CFP is a certification course. Even if you do CFP, you can continue with your distribution business. However, if you want to take up the profession of fee-based financial planner, then you have get registered with SEBI as an Investment Adviser. In that case you cannot continue commission based business. Hope this clarifies.
Hi Kruti, I would like to become SEBI investmetn Advisor. I have Equity derivative NISM certification and I will give NISM exam of investment advisor XA & XB in this month. Also I am handling my family & friend demat account with net worth of 50Lac from last 3 years. After paasing the exam, Can I be eligible for SEBI IA license. I open my orgnization where I will do the business for Advisory. please guide me. Thank you. Gaurav
Hi Gaurav. What is your education qualification? SEBI has recently approved the amendments to IA regulations and enhanced qualification requirements. The final copy of regulations is yet to be published by SEBI. However in the consultation paper, there is a mention of requirement of 5 years of experience along with post graduation. Do you have working experience of 5 years?
Mam i planning to apply for investment adviser (IA) as a individual , but my net worth right now is not 10 lakh, means according to your point i not eligible for that. Please suggest…..
Hi Priya. This is a consultant paper in draft stage. Yet to become regulation. If you apply now, you will need net worth of 1 lac. However if the draft becomes a rule then SEBI will give time to fulfil the net worth requirements for registered investment advisers. If you need professional help in making an application to SEBI pls let me know.
what is the time duration upon sebi RIA renewal ? got any changes to , is it every 5 years as usual individual 10k & co. 5L ?
Hi Lalith, renewal of registration remains the same i.e. every 5 years. Also SEBI has not proposed any changes to fees.
Very nicely interpreted the concept. What I feel is SEBI should also clarify on many clauses which will affect the existing clients with this consultation paper.
Thanks Swati. Yes, it should!
Great summary of all the key points from the paper 👍🏼👏🏻👏🏻 Hope they stick to a set of rules and do not keep changing them in the future so people can plan their business models accordingly.
Thanks Vasudev. Fingers crossed! 🙂
First of all the official of sebi NSE BSE should be honest In discharging there duties