The market regulator, Securities and Exchange Board of India (Sebi), recently published the Investment Advisors Regulations (SEBI regulations) with an objective to regulate all advisors who provide investment advisory services to investors based in India. These regulations are important for investors to know and understand as they are meant to protect and enhance investors’ interests.
Advisors providing advice in relation to insurance, investments, financial planning and allied matters are found in various forms and under different brand names. Instances of improper and unsuitable advice rendered to retail investors are plenty. These regulations are intended to help investors identify investment advisors under one category by having these advisors registered under the recently published regulations.
Following are some facts that every investor should know about these regulations so as to facilitate the choice of the right investment advisor for oneself.
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Only persons who are engaged in the business of providing investment advice to clients for a consideration (that is, fees) are covered under these regulations. Such advisor may prefer to be known as investment consultants, investment advisors, and financial consultants or by any other name; however, they would be required to be registered under the SEBI regulations. Individuals, firms, companies and even banks providing / seeking to provide investment advisory services would be covered under these regulations.
Services covered under these regulations
Persons engaged in providing advice relating to investing in, purchasing or selling of securities, investment products and advice on investment portfolio containing securities or investment products for the benefit of the client are covered herein. Not only written, but advice given through oral or any other means of communication is covered. Financial planning, too, is covered under the ambit of these regulations.
Insurance agents or brokers who offer advice solely in insurance products and registered with IRDA or distributors of mutual funds (and registered with AMFI) are not required to be registered under these regulations. Stock brokers (registered with SEBI) and pension advisors offering advice only on pension products are also kept out of this ambit. So, investors will now need to decide and choose whether they need advice in relation to their investments and financial planning or merely support from advisors in relation to selection of insurance products or mutual fund products. In the former case, they could choose to connect with a registered Investment Advisor or continue to be served by their insurance or mutual fund advisors in the latter case.
Advisor credentials
The regulations have addressed concerns that investors have while choosing investment advisors or financial planners such as qualifications, experience, and so on. An individual who wishes to get registered, needs to have a minimum professional qualifications or post graduate degree in finance, accountancy, capital market, banking, insurance and similar sectors. Alternatively, a graduate in any discipline needs to satisfy the experience criteria of at least five years in activities relating to advice in financial products. In addition to these advisors will also be required to have certifications recognised by SEBI in this sector.
In other words, investors can now be rest assured that advisors registered under these regulations would have satisfied the basic qualifications and experience criteria.
Advisor compensation
Investors should now be ready to pay for the investment advice they seek from such registered advisors, as the regulations mandate that such advisors have to be compensated only by the investors and not by way of commissions from securities or products. This move is expected to avoid any conflict of interest between the advisory and distribution services that the investment advisor may be engaged in. Investors would benefit a great deal on account of this model, as this would help them get independent and unbiased advice from their advisors.
Although the regulations are silent on the way these fees would be charged, globally, the fees are either a flat-fee or even on an hourly basis for the time spent working on an assignment. Investors, in their own interest, should ascertain at the inception of the advisory services about the fees that would be charged for services.
The regulations mandate that the investment advisors, at all times, shall act in fiduciary capacity towards their clients and disclose conflicts of interest, as and when they arise. These advisors would also be required to follow a Code of Conduct which includes elements like gaining all relevant information relating to clients, providing all necessary information to clients, charging fair and reasonable fees, and so on.
These regulations will go a long way in helping investors obtain right and prudent investment advice for their investments and financial needs by ensuring that advisors are professionally qualified and capable of providing sound advice. The regulations will also help regulate the large unorganised sector of investment advisors for the benefit of the investor fraternity.
The writer is a certified financial planner
