The Securities and Exchange Board of India (Sebi) has narrowed the scope of investment advisors (IA) in terms of the advice they give to their clients.
Recently, Guardian Capital Investment, a registered investment advisor (RIA) had sought informal advice from Sebi on various aspects related to client advisory. In its reply to their letter, Sebi said that RIAs cannot earn commission by recommending any product, including fixed deposits, to their clients.
Besides these investor-centric guidelines, Sebi also mentioned a host of issues for RIAs that focussed on corporate and client aspects. Read on to find more.
Two Separate Clients: According to the new guidelines, an RIA can only offer investment advisory services or investment product distribution services, and there has to be a clear segregation between the two. This will not be problematic for new clients who will now get to choose whether they need advisory services or distribution services at the time of account opening. RIAs are not allowed to offer distribution and advice to the same client.
Sebi said in the circular: “Existing clients, who wish to take advisory services, will not be eligible for availing distribution services within the group/family of IA. Similarly, existing clients who wish to take distribution services will not be eligible for availing advisory services within the group/family of IA.
RIA Fees: Sebi said there can only be two models of fees collection. One is asset under advisement (AUA) mode, and the second is the fixed fee mode. In the AUA mode, a maximum of 2.5 per cent of AUA per client per annum can be charged. In the flat fee mode, a maximum fees of Rs 1.25 lakh per client per annum can be charged.
Audit: The Investment Advisory (IA) regulations were originally out in 2013, and then subsequently amended in 2020. The amended regulations says that the mandatory audit shall be completed within six months from the end of the financial year.
That said, if any adverse (negative) audit report is given by the auditor, then the IA will have to send it along with any action (if taken) with the necessary approvals in case the IA is a non-individual, to Sebi’s office in the IA’s city. This audit report and the explanation of the action taken will have to be submitted within a period of one month from the date of the audit report, latest by October 31.
Experience: The required certifications needed by an IA was laid down in the original IA regulations from 2013. The 2020 amendment gave an exemption to those IAs whose age is above 50, provided they have a valid certificate from the National Institute of Securities Markets (NISM).
But for individual investment advisor or a principal officer of a non-individual investment advisor registered as an investment advisor, they will have to have an experience of at least five years in activities relating to advisory services in financial products or securities, or fund or asset or portfolio management. For those persons who are associated with the investment advice team, they will need to have an experience of two years.