With an aim to safeguard investors' interest, markets regulator Sebi on Monday decided to tighten its eligibility norms for investment advisers and decided to introduce an upper limit for their fees.
Sebi also barred use of titles like independent "financial advisers" or "wealth advisers" by those dealing in distribution of securities, unless they are registered as investment advisers also.
Announcing a slew of amendments to its regulations for investment advisers, approved by Sebi's board here, the regulator said an individual adviser cannot provide distribution services, while firms would need to segregate advisory and distribution activities at the client level to avoid conflict of interest.
The new rules, framed after considering four consultation papers and public comments, are also aimed at bringing clarity in payment of fees and introduction of upper limit on fees charged to investors, Sebi said.
The last consultation paper was floated for public comments in January.
Sebi will also introduce enhanced eligibility criteria for registration as an investment adviser including for net worth qualification and experience. There will be a provision for grandfathering existing individual advisers.
For a greater transparency, an agreement would have to be signed between an adviser and the client, incorporating all terms and conditions.
The new framework is intended to strengthen the regulatory framework for investment advisers as well as empower them to effectively discharge their responsibilities towards the investors who are their clients.
The move comes after the regulator received numerous investor complaints against investment advisers and most of the complaints were related to assured returns being offered by IAs, charging of exorbitant fees from client with false promises of handsome returns, mis-selling without adhering to the risk profile of the client, non-disclosure of complete service fees and charges and extracting money in the name of various charges.
Commenting on Sebi's move, iFAST Financial India Managing Director Erik Hon said, "From an implementation point of view, we will need more details for clarity. For example, is the segregation of advisory and distribution activities at client level or family level as well? Will there be clear differentiation between mutual fund distributors and investment advisers in terms of permitted activities and services or is it only a difference of nomenclature?."
According to the consultation papers floated in January, the regulator had proposed two mechanism under which an investment adviser (IA) can charge fees -- assets under advice (AUA) mechanism of fees and fixed fees.
Under the AUA mechanism, the maximum fees that can be charged will be 2.5 per cent of AUA per annum per family across all schemes or products, and the upper limit of Rs 75,000 annually per family has been proposed under fixed fee model.
If agreed by the client, IA can charge fees in advance. However, such advance cannot exceed fees for two quarter, as per the proposal.
With regard to net worth, Sebi proposed that IA who are individuals need to have net worth of at least Rs 10 lakh, while the same for non-individual IAs should be at least Rs 50 lakh.
Currently, individuals are required to have a net worth of Rs 1 lakh, while the same for body corporate or non-individuals is at least Rs 25 lakh.
The existing investment advisers need to comply with the new net worth requirement within three years.
Further, it had been proposed that IA should clearly declare to the client that it will not seek any power of attorney from its clients for auto implementation of investment advice.
It had also been suggested that IA should not come out with any investment advice suggesting assured returns to clients in the investment advisory document.
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