Reining in investment advisers

| Updated on January 27, 2013 Published on January 27, 2013

SEBI’s investment adviser regulations leave out many market players offering such services, incidentally or otherwise.

For a law that was supposed to push through significant reforms in the functioning of investment advisers, the Securities and Exchange Board of India’s (SEBI) recently notified regulations fall rather flat. The problem is that there is a basic conflict of interest arising from those styling themselves as investment advisers also being distributors of financial products from which they earn commissions from their originators. The regulations do not address this problem and thus inadequately protect investors. The potential for such interested ‘advice’ leading to mis-selling of products or unnecessary churn in the investors’ asset portfolio is obvious. While SEBI’s earlier concept paper on the issue had suggested a distinction between an agent earning a commission from financial product originators and advisers who did not, the final regulations are curiously silent on this aspect. Also, they bring under their purview only those providing investment or financial planning advice for a consideration and claiming to be in this business. In the process, a whole range of market participants have been exempted. That includes mutual fund distributors, brokers or sub-brokers, who dispense advice supposedly incidental to their ‘core’ activity but which can be biased and detrimental to investors.

The regulations have similarly left out advisers dealing solely with insurance or pension products; lawyers and chartered accountants proffering such advice ‘incidental’ to their professional services; and those doing so through print or electronic media platforms. Exempting the first two categories might be justified since they are governed by other regulators like Insurance Regulatory and Development Authority or the Institute of Chartered Accountants of India. But there is no reason, when it comes to publicly disseminated advice, for not distinguishing between pure advisers and those who are also agents earning commissions. The latter ought to be brought under the regulations’ purview, as was actually recommended by the concept paper.

That said, while the large escape route that SEBI has left open for many market players who are also in the investment advice game – incidentally or otherwise – is certainly a deficiency, the latest regulations have something positive to offer. The rules, so long as they apply to financial planners, wealth managers, and banks or financial institutions providing investment advice, lay down comprehensive guidelines. These pertain to the nature of information that these entities have to obtain from their clients, the specific records and documents needed to be maintained, and so on. The investment adviser also has to disclose whether he has been subject to past disciplinary action or has any related entity that is in the business of distributing financial products and, hence, could indirectly benefit from his advice. The very requirement for an investment adviser to obtain a certificate of registration from SEBI and the comfort of seeking counsel from such an entity should be good for investors. They will at least have the comfort of knowing that the adviser is adequately qualified and likely to give unbiased advice.

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Published on January 27, 2013
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