At the point when Indore-based Prashant Chitnis, 64, a retired banking officer, applied to market regulator SEBI for a Registered Investment Adviser (RIA) license, he was in for a rude shock. Chitnis was already selling mutual funds (MFs) and insurance policies, yet he wanted to get into goal-oriented financial planning. SEBI demanded bunches of data. It requested offer letters of all his previous employers, copies of bank statements of all accounts that he had ever held, and even bills of his laptop, printer and other office infrastructure. SEBI additionally requested all his Form 16 and 26AS income tax documents, notwithstanding his return filings.
Frustrated, Chitnis visited the SEBI’s local office a few days later. There was a deeper issue.
A SEBI official let him know that it has quit giving RIA licenses there starting around 2018. Numerous SEBI-registered investment counsels from Indore, and somewhere else in Madhya Pradesh, were found giving questionable stock tips under the garb of investment guidance and charging fees. Regular police visits at SEBI’s Indore office to research how such individuals were given licenses in the first place, prevented the regional office there from giving new ones.
SEBI’s refusal to give any RIA licenses in Indore is one part of the issue. The more serious issue is that in spite of the guidelines being almost nine years of age, there are just 1,321 RIAs according to SEBI information as of September 28, 2021. On the off chance that you get rid of those giving simply stock tips, there are generally only 400 financial counselors in the country. Furthermore, just 50% of them would be pure fee-based individual counselors. The other half includes corporate counsels who additionally acquire a distribution commission. On the other hand, there are almost 4 crore MF investors and one more around 2-3 crore Demat account holders. It’s a yawning gap.
The birth of (authorized) investment advisory in India
Spurred by the numerous complaints about mis-selling of products over the years, SEBI decided to make investment counsels responsible. It gave the Investment Adviser Regulations in January 2013.
The guidelines said that the individuals who offer investment advice across products or charge a fee, must register. Mutual fund distributors (MFDs) who offer restricted advice, accidental to their bigger activity of selling MFs, were exempted.
Yet, the guidelines threw more questions than answers. For example, MFDs were permitted to acquire commissions from mutual funds by distributing schemes and furthermore charge advisory fees (only for basic advice that they were permitted to render), under one roof. However, RIAs were not permitted to acquire distribution commission income except if they were non-individuals having a separately-identifiable department.
What RIAs can do and what they can’t
As time moved by, SEBI began deliberations. It asked for feedback on how the guidelines could be refined and more individuals could be nudged to register as investment counselors. The idea was to sort out some way to segregate investment guidance and distribution, obviously define what MFDs and investment counselors could do, and build the choice accessible to investors as far as go-betweens. That way, investors would have simpler decisions to make dependent on whether they simply needed to put resources into a mutual fund or on the other hand on the off chance that they required financial planning. SEBI additionally wanted to ward those giving just stock tips away.
After four consultation papers spread more than three-and-a-half years, SEBI at last tightened the investor counselor guidelines in July 2020. It said that individual advisors can just procure a fee income. They can’t sell mutual funds and acquire commission. Non-individual or institutional counsels can offer both (investment advisory and distribution), yet not to a similar customer.
Increasing the bar or restricting entry?
SEBI likewise tightened the qualification standards. All counsels should have a post-graduate qualification and somewhere around five years of relevant work experience. This became an impediment for quite a few.
Chennai-based S.A. Subarajah saw his RIA application dismissed by SEBI in June 2021. Subarajah is an IIT Madras graduate, cleared his civil services exam and worked in the Central Board of Indirect Taxes and Customs in Chennai for 13 years. A job abroad for six years and two more investment advisory certifications later, he decided to apply for the investment adviser license earlier this year.
SEBI said that he didn’t have work experience in offering investment guidance. “As per earlier guidelines, I would have qualified because, at that time, what was required was the necessary education or work experience. Now, the revised guidelines ask both. I have worked for the Government of India under the ministry of finance for 13 years. That too isn’t enough. What’s worse, there is no way to appeal against SEBI’s ruling,” he says.
Further, licensed advisors are currently mandated to re-take the advisory certification exam every few years. Prior, they needed to show proof of their proceeding with education credits by attending seminars, conferences, etc, to keep their licenses substantial. Suresh Sadagopan, Founder of Ladder7 Financial Advisories says: “Despite 17 years of financial advisory experience, I still had to take the same, back-to-basics, exam every time I renewed the certification. It’s pointless for experienced advisers,” he says. That is not all. SEBI likewise fixed the maximum fees that RIAs can charge.
Likewise, when individual counsels cross 150 customers, they need to become corporates. Doing as such would require a higher networth of Rs 50 lakh.
Issues versus need
Renu Maheshwari, a SEBI-registered investment advisor and CEO and principal advisor at Finscholarz Wealth Managers LLP, says that an RIA model is “a complicated one to pursue.” She says that the distribution business is easier to practice and makes enough money. RIA is a consulting practice and requires a different orientation. With a higher entry barrier to become an RIA now, it’s not uncommon hearing distributors avoiding investor adviser registration. That didn’t deter Maheshwari though. She jumped straight into becoming an RIA – she was never a MFD before that. “If you do the right thing and act in clients’ best interests, they will pay you,” she says.
Sadique Neelgund, founder of Network FP, says that “such high entry barriers have been created to discourage stock tip givers from entering the fray and mis-selling. However, it has impacted ethical financial advisors and planners.”
Vishal Dhawan, an affirmed financial planner and founder-CEO of Plan Ahead Wealth Advisors is a bit more hopeful. He calls attention to that SEBI’s four white papers were an evolution journey. SEBI itself went back and forth on a few points, before it came out with Regulations 2.0 in 2020, he says. This, he reminds us, happened only a year back in September 2020. “Technically, it has just been a year since the RIA guidelines were finalised. If distributors take a corporate license, they can advise and distribute. We need to wait and see how distributors and advisors adopt the Regulation 2.0.”
Dhawan feels the main reason for not very many counsels in the country is SEBI failing to enforce its own guidelines of guaranteeing multi-product advice being accessible just through RIAs.
Disclaimer: The views, suggestions, and opinions expressed here are the sole responsibility of the experts. No Capitalize You journalist was involved in the writing and production of this article.