You're an investment advisor or want to become one? The bar just got raised

Complying with the new norms will take a lot of effort and readjustment by existing advisors

The Securities and Exchange Board of India’s (Sebi) Investment Advisor regulations of 2013 are being overhauled. The regulator has issued four consultation papers in this regard and has sought feedback. After its board meeting in mid-February, it issued a press release that offers a clue of the forthcoming changes, though the details are still awaited. Sebi-registered investment advisors (RIAs) are a worried lot as they feel that many of these changes could make it more difficult for them to practise fee-only advisory.          

Cap imposed on fee: The press release that Sebi issued after its board meeting in the middle of this month said an upper limit would be introduced on fees charged by Sebi RIAs from investors. The fourth consultation paper issued by it in January had said RIAs would either have to follow a fixed fee model, under which a client cannot be charged more than Rs 75,000 in a year, or they could follow a percentage-of-asset-under-advice (AUA) model, where the fee cannot exceed 2.5 per cent. The final numbers have not been announced yet.

The very idea of a cap on fee has caused consternation among Sebi RIAs. "There is no upper limit on the fee that other professionals like lawyers, chartered accountants, or doctors can charge from their clients. So why impose it on RIAs?" asks Gaurav Mashruwala, a Mumbai-based certified financial planner.

The January consultation paper says RIAs cannot switch from one model to another before the end of 12 months from the time of onboarding or last change. But RIAs say many of them follow a hybrid model, consisting of a fixed fee and a percentage of AUA fee. "When the client approaches the RIA for the first time, typically a financial plan is prepared for him. That work is typically done on a project basis. RIAs usually charge a fixed fee for it. Thereafter, it is up to the client whether he wants a continuing engagement with the RIA. In that case, planners could charge the client on a percentage of AUA basis. Not allowing a hybrid fee model could prove restrictive," says Suresh Sadagopan, certified financial planner and founder of Ladder 7 Financial Advisory.

Moreover, a lot of the work done by RIAs is not asset-based. "In case of a client who is steeped in debt, or where we have to work on succession planning, no asset is involved. The percentage of AUA model would not work in such cases," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. One issue with having an absolute amount like Rs 75,000 as the ceiling is that it is not inflation-adjusted, and its value would reduce with the passage of time.

The proposal to not allow RIAs to charge more than two quarters worth of fee as advance could also cause problems. Suppose that the RIA has only created a plan for the client, and he decides to implement it himself. The RIA could lose contact with the client and may find it difficult to collect the balance 50 per cent of his fee from him. "Sebi should allow RIAs to collect fee for at least one year at one go," says Dhawan. Reaching out to the client twice in a year to collect the fee will also add to costs, he says.

On the fee structure, Avinash Luthria, a Sebi registered investment advisor and founder, Fiduciaries has a suggestion: "One option is that Sebi could clarify that the fixed-fee charged by a RIA can exceed Rs 75,000 if it does not exceed Sebi’s proposed cap of 2.5 per cent of AUA."

Segregation of advice and distribution: Until now, individual RIAs could only advise and were not allowed to distribute. Going by Sebi's press release, the status quo prevails in their case.

However, corporate RIAs will be affected. Until now, they could have a separately identifiable department or division (SIDD) through which they could also distribute products. A client could take advice from one division and buy products from the distribution arm.

Now, they will also have to adhere to segregation at the client level. In other words, if a client takes advice from a corporate RIA, he will not be able to avail of distribution service from him (even from another arm). "Corporate RIAs may have to opt for either advisory or distribution service, depending on the type of clients they are trying to attract," says Dhawan.

Compulsory corporatisation: One provision in the January consultation paper says that an individual RIA will have to re-register himself as a corporate RIA once his aggregate AUA from clients exceeds Rs. 40 crore, or the number of clients rises above 150. "Our suggestion should be that the criterion should not be the number of clients or AUA. Ideally, it should be revenue of the RIA," says Lovaii Navlakhi, managing director and chief executive officer, International Money Matters.

Hike in net worth: The January consultation paper also suggests hiking the net worth of individual RIAs from Rs 1 lakh currently to Rs 10 lakh. In the case of corporate RIAs, it suggests doubling the net worth from Rs 25 lakh to Rs 50 lakh. "The hike in net worth criterion may not matter so much to corporates, but it appears rather steep for individual RIAs," says Navlakhi. It would raise the entry barrier for youngsters who wish to set up their own practice.

Key changes Sebi RIAs will have to deal with

• Upper limit to be introduced on fee charged from clients
• RIAs, corporate and individual, will have to segregate distribution and advisory at client level. Both services can’t be offered to the same client
• Eligibility criteria to be enhanced, including net worth, qualification, and experience requirements. However, grandfathering provision offered to existing RIAs
• Mandatory to have RIA-client agreement outlining terms and conditions of the engagement
• RIAs may offer implementation/execution services using direct plans