When based in Indore Prashant Chitnis, 64, a retired banking officer, was in for a rude awakening when he applied to market regulator SEBI for a Registered Investment Adviser (RIA) licence. Chitnis was already selling MFs and insurance policies, but he wanted to branch out into goal-based financial planning. SEBI demanded a great deal of information. It requested offer letters from all of his previous employers, copies of bank statements from all accounts he had ever held, and even bills for his laptop, printer, and other office equipment. In addition to his return filings, SEBI requested all of his Form 16 and 26AS income tax documents.
Chitnis, frustrated, went to the SEBI’s local office a few days later. There was a deeper issue at hand.
According to a SEBI official, RIA licences have not been issued in India since 2018. Many SEBI-registered investment advisers in Indore and elsewhere in Madhya Pradesh were caught providing dubious stock tips while charging fees. Regular police visits to the SEBI’s Indore office to investigate how such people were granted licences in the first place discouraged the regional office from issuing new ones.
One aspect of the problem is SEBI’s refusal to grant any RIA licences in Indore. The bigger issue is that, despite the regulations being nearly nine years old, according to SEBI data as of September 28, 2021, there are only 1,321 RIAs. If you exclude those who only provide stock recommendations, there are only about 400 financial advisors in the country. Only half of them would be fee-only individual advisors. The other half is made up of corporate advisors who are also paid a distribution commission. On the other hand, nearly 4 crore MF investors and another 2-3 crore demat account holders exist. It’s a huge chasm.
Following numerous complaints about product mis-selling over the years, SEBI decided to hold investment advisers accountable. In January 2013, it issued the Investment Adviser Regulations.
According to the regulations, those who provide investment advice across products or charge a fee must register. Mutual fund distributors (MFDs) who provide limited advice as part of their larger business of selling MFs were exempted.
However, the regulations raised more questions than they answered. For example, under one roof, MFDs were permitted to earn commissions from mutual funds by distributing schemes as well as charge advisory fees (only for basic advice that they were permitted to render). However, RIAs were not permitted to earn distribution commission income unless they were non-individuals with a distinct department.
What an RIA can and cannot do
As time passed, SEBI began deliberations. It requested feedback on how the regulations could be improved, and it suggested that more people be encouraged to register as investment advisers. The goal was to figure out how to separate investment advice and distribution, clearly define what MFDs and investment advisers could do, and increase the number of intermediaries available to investors. Investors would have fewer options depending on whether they just wanted to invest in a mutual fund or if they needed financial planning. SEBI also wanted to keep those who only gave stock tips at bay.
SEBI finally tightened investor adviser regulations in July 2020, after four consultation papers over three and a half years. Individual advisors can only earn a fee, according to the statement. They are unable to sell mutual funds and earn a commission. Both (investment advisory and distribution) can be provided by non-individual or institutional advisors, but not to the same client.
Raising the bar or limiting access?
SEBI also tightened qualification standards. All advisors must have a postgraduate degree and five years of relevant work experience. This became an impediment for many.
Chennai-based SEBI rejected S.A. Subarajah’s RIA application in June 2021. Subarajah graduated from IIT Madras, passed the civil services exam, and worked for the Central Board of Indirect Taxes and Customs in Chennai for 13 years. After six years abroad and two additional investment advisory certifications, he decided to apply for the investment adviser licence earlier this year.
According to SEBI, he has no prior experience providing investment advice. “According to previous guidelines, I would have qualified because what was required at the time was the necessary education or work experience.” The revised guidelines now request both. For the past 13 years, I have worked for the Government of India in the Ministry of Finance. That, too, is insufficient. Worse, there is no way to appeal SEBI’s decision,” he says.
Furthermore, licenced advisors must now retake the advisory certification exam every few years. Previously, they had to show proof of continuing education credits earned by attending seminars, conferences, and other events in order to keep their licences valid. “Despite 17 years of financial advisory experience, I still had to take the same, back-to-basics, exam every time I renewed the certification,” says Suresh Sadagopan, Founder of Ladder7 Financial Advisories. “For experienced advisers, it’s pointless,” he says. That isn’t all. The maximum fees that RIAs can charge have also been set by SEBI.
Furthermore, once an individual advisor reaches 150 clients, they must become corporates. This would necessitate a higher net worth of Rs 50 lakh.
Problems vs. Need
According to Renu Maheshwari, CEO and principal advisor at Finscholarz Wealth Managers LLP and a SEBI-registered investment advisor, an RIA model is “complicated to pursue.” She claims that the distribution business is simple to run and profitable. RIA is a consulting practise that necessitates a different mindset. With the entry barrier to becoming an RIA now higher, it is not uncommon to hear distributors avoid investor adviser registration. But Maheshwari was undeterred. She became an RIA right away, having never been an MFD before. “If you do the right thing and act in the best interests of your clients, they will pay you,” she says.
According to Network FP founder Sadique Neelgund, “such high entry barriers have been created to discourage stock tip givers from entering the fray and mis-selling.” It has, however, had an impact on ethical financial advisors and planners.”
Vishal Dhawan, a certified financial planner and the founder and CEO of Plan Ahead Wealth Advisors, is more upbeat. He emphasises that SEBI’s four white papers were the result of an evolutionary process. He claims that SEBI went back and forth on a few points before releasing Regulations 2.0 in 2020. He reminds us that this happened just a year ago in September 2020. “Technically, the RIA guidelines have only been in effect for a year. Distributors who obtain a corporate licence can both advise and distribute. We will have to wait and see how distributors and advisors implement Regulation 2.0.”
Dhawan believes that the main reason for the country’s lack of advisors is SEBI’s failure to enforce its own regulations requiring multi-product advice to be available only through RIAs.