A lot has already been written about the new amendments to RIA regulations. While the changes are applicable to RIAs, there is one more set of people who have been affected – the Mutual Fund Distributors (MFDs).
With the latest amendment to RIA regulations, SEBI has put the MFDs in a fix.
And the one big change that has affected the MFDs the most is this – “…..no person, while dealing in distribution of securities, shall use the nomenclature “Independent Financial Adviser or IFA or Wealth Adviser or any other similar name” unless registered with the SEBI as Investment Adviser.”
Now, there are several mutual fund distributors who use the words like ‘Wealth Managers’, ‘Financial Advisers’.
With introduction of the new regulation, SEBI has clearly stated that only Investment Advisers registered with SEBI are Wealth Advisers or Financial Advisers or Wealth Managers.
The distributors cannot be financial advisers or wealth advisers or offer financial advice / financial planning unless they get registered with SEBI.
The introduction of this amendment in RIA regulation has forced MFDs to re-evaluate their business model.
While there are many questions on the mind of a Mutual Fund Distributor, I take up 10 burning ones at this stage and my view/interpretation of the same.
#1 – Can a MFD charge advisory fees?
MFDs can only earn commissions. They cannot charge advisory fees. If they charge an advisory fee, how will the advice be incidental advice?
#2 – What is incidental advice?
Incidental advice means advice given on the basis of facts and features of mutual funds. MFDs can distribute suitable mutual fund schemes to the investors describing product specification, material facts of the scheme and the associated risk factors of the scheme.
In spirit, SEBI wants MFDs to act as an agent in distribution of mutual funds and facilitate transactions.
#3 – Can MFDs discuss financial goals and suggest mutual funds?
If MFDs discuss financial goals and suggest mutual funds, it will be considered as investment advice.
Definition of investment advice includes financial planning. As per SEBI IA regulations, Financial planning includes identification of their financial goals, and developing and recommending financial strategies to realise such goals. MFDs cannot offer any financial planning services to the investor which requires risk profiling, financial goal setting, etc.
In spirit, SEBI wants MFDs just to distribute mutual funds. All advice and financial planning has to be done by RIA.
#4 – If an MFD has CFP from FPSB or CWM from AAFM can he / she use the same with his/ her name?
An MFD may use the CFP / CWM certification as an education qualification but cannot advise or charge fees for advice.
#5 – If the mutual fund distributor is registered as “XYZ Wealth Adviser Pvt Ltd” would it be allowed to function as a Mutual Fund Distributor through the term” Wealth Adviser” or “Advisory” in the name of the corporate entity itself?
No. MFDs cannot use such nomenclature unless they are registered with SEBI. In spirit, this applied to companies too.
Such companies may have to apply to MCA for a change of name. However, more clarity is expected from SEBI in this regard.
#6 – If the husband is an individual RIA and wife is a shareholder / director of a private company which is an MFD, where Husband is not director / shareholder, can they provide service to the same client?
The amendment for client level segregation was introduced to avoid any conflict of interest. Although the same has not been envisaged in the amendment regulations, in spirit, this will be a conflict of interest.
#7 – Can an MFD make videos on investing on YouTube or other social media platform?
Yes, as long as there is no investment advice provided, MFD can post such videos on social media platform.
#8 – If an individual or corporate MFD wants to convert into a RIA, what happens to the existing AUM?
As per the second consultation paper, MFDs who want to get registered as investment advisers shall be allowed to receive trail commission for the products already distributed subject to disclosure to the clients. They shall not be allowed to sell/distribute any investment product pursuant to grant of registration as investment adviser. So, SEBI may allow ARN to continue but will not allow procuring new business under the same. However, SEBI is yet to issue clarification and guidelines on this.
#9 – Can MFDs sell insurance?
Yes, MFDs, who also have an IRDA license, can distribute insurance products provided they offer only incidental advice.
#10 – If an individual MFD wants to get registered as an RIA, will the experience as an MFD be counted for applying as an RIA? What changes are recommended if that MFD already has 150 clients?
Yes, SEBI will consider the experience of being an MFD. In case an MFD already has 150 clients, the application to SEBI has to be for a non-individual RIA.
So, if MFDs want to charge fees and provide financial planning and investment advice services to clients, they have to get registered with SEBI as an Investment Adviser.
Mutual fund distributors have to take a long term view of the business they want to be in and make suitable changes starting now.
My nephew is a MFD he has named his company as Modak Finserv is this allowed.
Hello, yes, word “Finserv” is allowed.
Hello Mam. Can a MFD become a Authorised Person with a Stock Broker say Sharekhan and do broking business as well, selling MFs through Sharekhan and by himself individually.
Hi Sandeep, in my view, you can.
Very much thanks Mam.
Hi kruti,
Supposed x uncle is ria
Niece will become mutual fund distributor.
Still sebi has problem with that? Both are living in different state.
Hi. As per IA regulations, family of an individual investment adviser includes spouse, children and parents. So if the children of an RIA are MFDs, it is not allowed, irrespective of whether the family is staying together or not.
Hi Kruti
I am getting LLP incorporated with friend of mine for RIA purpose where I will be Principle Officer and eligible with criteria for RIA Recognition. However, my brother in law and father in law are Partners into a LLP which is Mutual Fund Distribution.
I read somewhere that only self, spouse, parents and children cannot be into distribution services. Does extended family also cannot be into distribution business and can it attract conflict of interest for RIA License?
Hi Aayush, no, extended family is not included in the definition. If you looking for professional help in making an application to SEBI, please write to me at kruti@cskruti.com.
hi, vivek here,
we are trying to incorporate LLP for mutual fund distribution, we have made the objects as such .
but we got a rejection stating finance activity /NBFC not allowed as per RBI guidelines .
can you please let me know objects which would be allowed , kindly share me if possible to vivekviky.hs@gmail.com
Hi Vivek. Doing a mutual fund distribution business under an LLP is allowed. It is not an NBFC activity. There are so many LLPs which have MFD licence. You can get the information on the web. It depends on what you have mentioned as objects clause in the LLP agreement.
Dear Kruti, could you please help me understand this. Can a registered RA And IA register as a mutual fund distributor? will there be any conflict of interest.
Hi Sonali, in my experience of helping in application process, SEBI has not allowed the RA and IA applicants to have MFD license too.
Post graduation in which stream is required? Ma in economics ok….or it’s normal mba
MA in economics, in my view, will be considered provided it is from university or institute recognised by the central or the state government.
Hi Kruti,
Me and my friend are partners in two firms, one is LLP and other is partnership firm. We are working as MFD in partnership firm. Now we want to get the LLP firm registered as RIA. Can we do that as partners in both the firms are same. or will it cause conflict of interest?
Hi Riddhi, in my view SEBI will see this as a conflict of interest for the partner who will be acting as the principal officer of the LLP.
Hello Kruti, Thanks for the informative article. I have recently cleared CFP, and i am not eligible to be a RIA as i dont meet the Education Criteria. So i was thinking to Opt for MFD & Insurance broking model.
1) Does it make sense to have the ARN in my wifes name and Insurance broking under my name. I don’t plan to Charge for advisory or anything, Just that i like to make financial plans and provide to my clients, free of cost.
Please Do gude. Thanks.
Hi Harsh, not sure why you want to do the segregation of MFD and Insurance broking business. Pls let me know.
Hi Kruti,
If I keep client level segregation, then can I hold RIA and MFD both?
i.e. RIA clients not served for MFD and vice versa. Client will be given choice of whether he wants RIA or MFD
Hi Ajay, in my view, an individual cannot be both.
If an LLP has 2 partners which is registered MFD with Partner A has passed relevant exams and now Partner B (having educational qualification and experience) wants to get registered as IA along with other 2 additional partners under same name. Can both license of IA and MFD be allowed to be continued if they agree to keep client level segregation in records, bank, office space and services for distribution and advisory?
If your question is whether a LLP can have MFD as well as RIA license, my answer would be yes provided the client level segregation compliance is met. Also, the businesses have to be handled by two different partners.
Can MFD become Reserch analyst on shares.
In my view, MFD can be Research Analyst. But you need to check with SEBI if it will allow you to keep the MFD license.
Hi Kruti
Is there any update on whether MFD can be a RA also?
Hi Vishal, there is no written update by SEBI. However, in my experience of helping applicants get RA license, SEBI officers have asked the applicants to surrender the MFD license if they have.
In my case my ARN is in a partnership firm (2 partners in all)
EUIN is in my name.
I am a post graduate in Finance with 20 yrs of experience
My partner is a BCA and has IRDA certification
So do you reckon that there is any way I or my partner can get a RA licence ?
Hi Vishal, can you pls send an email to kruti@cskruti.com with details on why you want to get registered as RA?
Hi Kruti
I am planning to start LLP with name PR FinServ or PR Finvest. Is it allowed by AMFI nomenclature? Also LLP is allowed to do MFD and insurance distribution business? can i have LLP name as PR FinServ or PR Finvest?
Yes you can have those names.
Hello Kruti,
Can an Individual RIA use words like “ABC Wealth Management/Consultant/Creators”????
Hi Anamika, yes, can use.
is it possible to apply with name XYZ INVESTMENTS PVT LTD.
Yes
Has SEBI specifically given the directives for MFD role? Have they put a circular as they have done for RIA s role???
If yes cab you please share the same.
No, SEBI has not issued any such circular for MFDs.
Can MFD use firm name as Wealth Doctors Consultancy LLP
In my view you cannot use it.
Hello Kruti Ji,
With regard to the nomenclature just wanted to understand whether the word “Wealth” is not allowed or its not allowed when associated as “Wealth Manager or Wealth Advisor” etc.
Also there is no clarity whether the word “Management” is allowed or not.
So please just tell us what your take on the name “——— Wealth Management Pvt Ltd.”
Regards,
Ashwin.
Hi Ashwin, the name proposed by you will not be allowed.
For an RIA, as per the new guidelines a Post Graduation is a must. Can this be a 1 year programme or does it need to be a 2 yr programme ?
Any clarity ?
It has to be 2 year course.