What the changes in SEBI investment advisor rules mean to you

Lokeshwarri SK | Updated on February 20, 2020

SEBI's new rules seek to end practices such as misselling and bring in transparency in fees

The SEBI board has made some far-reaching changes to the rules guiding investment advisors (IAs). These changes have been in the works for a while now and SEBI has issued numerous consultation papers over the years in October 2016, June 2017, January 2018 and, more recently, in January 2020.

But the unique problems of the Indian market - where remuneration could be earned mainly through distribution commission - made a clear-cut segregation difficult.

The problem had been compounded by distributors using misleading names that made it difficult for small investors to differentiate between a SEBI-registered investment advisor and a distributor. Further, SEBI had been receiving various complaints about IAs offering assured-return products, charging very high fees, misselling to clients, not providing transparency in service fee and charges, and so on.

With a view to improve the conditions for investors, SEBI has brought about the following changes.

Corporate investment advisory

According to existing rules, corporate IAs can offer execution or distribution services through a separate division or department.

SEBI is now laying down that corporate IAs should not offer both advisory and distribution services to the same client. This segregation has to take place at the group level. What this means is that if a corporate group gives investment advice to a client through one company and buys and sells mutual funds for the same client through another group company, it is not allowed any more. The group has to choose whether it wants to provide advisory or distribution service to each client.

These rules are going to be extremely cumbersome if you are using the services of a corporate IA that executes your transactions through another company in the same group. You may henceforth have to execute the advice through another entity not belonging to the group.

Also, large financial services groups may now have to inform clients who use their wealth management services not to buy and sell funds or stocks through their banking channel.

For individual advisors

If you are using the services of individual IAs, not much has altered. IAs who were individuals and partnerships were not allowed to distribute products under the extant regime. These rules have been retained, though the discussion paper had suggested allowing them to distribute products while carrying out client-level segregation at the family-level, akin to corporate IAs.

This means if you are using the services of an individual IA, you can continue to do so, while executing the transaction through some other distributor or by yourself.

SEBI has, however, advised that IAs can help clients carry out mutual fund transactions using the direct route. This can save you the hassle of having to look for another entity to buy or sell products.

Distributors as advisors

The regulator has also laid down that mutual fund distributors should not go by misleading names such as ‘Independent Financial Advisor’ (IFA) or ‘Wealth Advisor’.

This is an important change that smaller investors need to take note of. Many of you could be using the services of a mutual fund distributor, who could be giving you incidental advice, without having registered as an IA with SEBI. Such advice is not regulated by SEBI and could fall well short of the required standards. Many such distributors also call themselves IFAs, leading to further confusion. These practices will now have to change.

Your mutual fund agent may now have to call himself/herself by a name that reflects the actual work he/she is permitted to do by the regulator.

Due diligence

The market regulator is also attempting to ensure transparency in the dealings between the client and the IA. It has, therefore, mandated that an agreement should be signed between the IA and the client that spells out the terms of engagement clearly. Since such agreements are not standardised documents, make sure that the terms in the contract adhere to the terms already discussed with the IA.

The SEBI board has also decided to lay down certain improved eligibility criteria for registration as an IA, including net worth, qualification and experience requirements. The exact requirements are not known yet. Once they are put in the public domain, do read through them.

SEBI has said that existing individual investment advisors will not be required to comply with the enhanced qualification and experience as specified by the board. So, you can continue with your existing advisor, even if he/she does not meet some of these criteria. But these eligibility requirements are designed to ensure that you are serviced by people who are qualified, skilled, experienced and have enough capital to be able to service you. So it would be best to stay informed about these

Published on February 20, 2020

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