Sebi's proposal to put cap on fee to put investment advisers in a lurch

Industry participants need to reply to consultation paper in 15 days from issue date

The Securities and Exchange Board of India's (Sebi) proposal to put a cap on the maximum fees which investment advisers can charge has led to strong pushback from investment advisers (IAs).

Investment advisers say if the proposal is implemented in the current form, it can drive away participants from the newly-created category.

"This cap on fee is going to be a fixed number, hard-coded with no provision for any escalation, as per the current consultation paper. The upper cap of Rs 75,000 is low even today. It will be difficult to offer comprehensive advisory services for clients, as the fee for the engagement in many cases would go far beyond this," said Suresh Sadagopan, founder of Ladder7 Financial Advisories.

"Hence, this will impact the viability of the fee-only advisory profession itself," he added.

The industry participants need to send in their responses or suggestions on the consultation paper by January 30, that is 15 days from the date of issue of this paper.

Sebi in its consultation paper has proposed two options to IAs. Either they can charge a maximum fixed fee of Rs 75,000 "per family across all schemes/products/services provided", or they can charge maximum of 2.5 per cent of assets under advisory (AUA).

According to industry participants, this can pose hurdles for several IAs currently operating on a hybrid model.

"We need to work with a hybrid model as it is difficult for IAs to service new clients with just AUA model, where the initial asset size is likely to be small. So, we need to charge a retainer fee along with a some fee as a share of the AUA," Vinit Iyer, Co-Founder, Wealth Creators Financial Advisors.

Industry players say that linking advice to AUA may not be feasible as financial planning also involves planning for life events such as paying for children's education.

In its 18-page consultation paper, the regulator has also proposed allowing an IA to run a distribution-based model as long as there is no duplication of clients.

"... the same client cannot be accepted for offering both advisory and distribution services within the group of the non-individual entity," the regulator said in its paper.

Similarly, individual IAs will also be allowed to offer both the services as long the client-level segregation is adhered to.

The regulator has also suggested a hike in net-worth requirement for individual IAs, as well as corporate body IAs. For individual IAs, the proposal is increase the requirement from Rs 100,000 to Rs 1 million. For corporate body IAs, or non-individual IAs, the net-worth requirement has been doubled from Rs 2.5 million to Rs 5 million.

According to proposals, the investment adviser and principal officer must also have post-graduate qualifications in finance, economics or related subjects.

Existing entities will need to meet the net-worth and qualification criteria within three years, Sebi has proposed.

Tighter norms mulled for IAs

*Fixed fee or fee as share of assets advised

*Fixed fee capped at Rs 75,000; asset percentage capped at 2.5%

*Net-worth requirement for individual IAs raised to Rs 1 million

*Doubled for non-individual IAs to Rs 2.5 million

*Minimum post-graduate degree/diploma in finance or related subjects needed, or a graduate with 5 years of experience in allied fields