SEBI prescribes norms for investment advisors

SEBI has asked investment advisors (IA) to segregate advisory and distribution activities at the client level. It has even capped their fees based on two alternatives — charges based on assets under advice or a predetermined fixed amount per annum for each client that cannot exceed ₹1.25 lakh.

Advisory agreement

SEBI has put in place a procedural framework pertaining to audit and record-keeping of IAs. As per the rules, an individual IA should apply for registration on on-boarding 150 clients. The IA will also have to enter an investment advisory agreement with clients.

SEBI has said that clients who take advisory services cannot get distribution services within the group/family of an IA, and vice versa for those getting advisory services.

“IA shall enter into an investment advisory agreement with its clients, including existing clients, latest by April 1, 2021, and submit a report, confirming the same to SEBI latest by June 30, 2021,” SEBI has said.

IAs can now charge fees from the clients in either of the two modes — assets under advice (AUA) and fixed fee. Under the AUA mode, the maximum fees that may be charged will not exceed 2.5 per cent of AUA per annum per client across all services offered by the IA. In the case of the fixed fee mode, a maximum of ₹1.25 lakh can be charged per client per annum.

An IA can charge fees under any one mode on an annual basis and change can happen only after 12 months of on-boarding. If agreed by the client, the IA may charge fees in advance. However, such advances cannot exceed the fees for two quarters.

Educational qualifications

On the qualification of IAs, SEBI has said that existing individuals above 50 years of age as on September 30, 2020, will not be required to comply with the qualification and experience requirements. However, such IAs will be required to hold NISM-accredited (National Institute of Securities Markets) certification.

As per the norms, IAs must have a post-graduate degree in specific subjects and five years of work experience related to advice in financial products or securities or portfolio management. An employee associated with investment advice also needs to have a post-graduate degree and two years of experience.

SEBI registration

An individual IA can apply for registration as a non-individual investment advisor on or before reaching 150 clients. Once the number of clients is more than 150, till registration as a non-individual IA is granted by SEBI, the IA cannot on-board new clients. However, during the period of examination of application by SEBI, individual IA can continue to service existing clients. In case the IA does not get registration, such IA will continue the advisory activities.

Record keeping

The IA will have to maintain records of interactions with all clients, including prospective clients (prior to on-boarding), where any conversation related to advice has taken place in the form of SMS or telephonic conversation, among others.

Such records will begin with the first interaction with the client and will continue till the completion of advisory services to the client. They need to maintain these records for a period of five years. In case of disputes, the records should be kept till its resolution or if SEBI desires that specific records be preserved, such records will be kept till further intimation from the regulator.

The deadline for compliance for these guidelines ranges from January 1, 2021 to April 1, 2021.