India’s investor crunch: Just one advisor for every 200,000 amid a retail stock market boom; is it sustainable?

Her story mirrors that of many others who, despite passing the RIA certification exam, chose not to renew their licences because of stringent regulatory requirements. Additionally, many financial professionals opted against pursuing the RIA certification, pointing to the high net-worth thresholds and fee structures that are not suitable for their small retail clientele.

This explains why, even 11 years after the market watchdog, Securities and Exchange Board of India (Sebi), introduced RIA regulations, the number of RIAs in the country remains shockingly low. According to data, currently, there are just 995 RIAs registerd with Sebi, which translates to one investment advisor for nearly every 200,000 investors in the country. In fact, the actual number of practicing RIAs, per experts, is much lower.

“The real number is less than 300,” says Sharan Hegde, a finfluencer with more than 6 million followers across multiple social media platforms. “I work with a SaaS company that provides software to RIAs, so I have visibility into the data. This includes both individual and corporate RIAs.”

Despite this precarious situation, there is still hope. Sebi has recently proposed new guidelines aimed at improving the accessibility and practicality of the RIA framework. For instance, under the new rules, RIAs are no longer required to appear for the XA and XB exams every three years for certification renewal conducted by the National Institute of Securities Markets (NISM).

“Now the XC exam has been introduced. At the time of renewal, RIAs are required to watch a video, followed by a test that focuses only on the [recent] changes in the industry. One can also take a test online,” says Lovaii Navlakhi, Chairperson of the Association of Registered Investment Advisors (ARIA). “I definitely see a multifold increase in the number of RIAs in the country once new guidelines get notified,” adds a hopeful Navlakhi.

This might herald a new beginning for RIAs in the country.

What’s Changing?

Currently, obtaining an RIA licence requires fulfilling several stringent requirements. For instance, one needs an MBA in finance or a postgraduate (PG) degree along with five years of relevant experience prior to becoming an RIA. These tough qualification regulations have deterred many from pursuing this path.

“We were struggling to find qualified people for the industry. A PG degree in finance was needed to run the business. These regulations made it harder to start, continue, and grow an RIA business,” says Navlakhi. He, however, is more optimistic now, as the Sebi, in its consultation paper, has proposed relaxing the prerequisites, and once notified, even a graduate will be able to apply for a licence.

Another big entry barrier was the stipulation of five years of experience in providing financial advice prior to obtaining a licence. Even Hegde, who is also the founder & CEO of financial platform 1% Club, faced this hurdle while expanding his business, grappling with the dilemma of whether to go for an RIA licence for himself to offer financial advice or to hire people with the licence and create content. But things appear to be improving for him and many other finfluencers; they will no longer be required to have five years of prior experience to operate as RIAs, as Sebi has proposed eliminating this rule as well.

Another pain point is the scope of expansion. RIAs are required to transition to corporate status upon exceeding 150 clients, necessitating an increase in their net worth from Rs 5 lakh to Rs 50 lakh. Under the proposed rules, Sebi has raised the threshold for corporate status to 300 clients. And, there shall be no net worth requirement for individual advisors, reducing the financial burden. Moreover, for non-individual RIAs, the required deposit amount will be based on the number of clients: a net worth of Rs 1 lakh is necessary for up to 150 clients, Rs 2 lakh for 150-300 clients, Rs 5 lakh for 300-1,000 clients, and Rs 10 lakh for 1,000 clients and above.

Although there is the expectation that relaxation in RIA guidelines will attract more advisors, critics caution that easing these conditions could potentially lower the quality of financial advice. Also, the recent surge of finfluencers, along with the strong network of mutual fund distributors (MFDs) may also impede the progress of RIAs.

But, Why are MFDs not becoming RIAs?

In India, MFDs sell regular plans and earn a commission of 30-100 basis points (bps) from asset management companies. In contrast, RIAs offer direct plans to their customers and charge them a fee directly for their services. Direct plans, according to Sebi regulations, are intended for customers who prefer DIY (do-it-yourself). So, DIY investors can save on RIA fees and MFD commission.

“The main difference between RIAs and MFDs is that the former advises on various Sebi-registered investment products, MFDs provide basic (incidental) advice on MFs that may suit an investor’s needs, but their main focus is on selling products,” says Manish Kothari of Z Funds, a MF distribution platform.

This distinction between MFDs and RIAs became prominent when Sebi first introduced RIA guidelines in 2013. These regulations initiated fiduciary services in investment advisory in India but had a limited impact initially. Therefore, on July 3, 2020, Sebi provided clearer guidelines for the advisory business, requiring intermediaries to choose their future direction.

It’s been more than a decade now; while India currently has nearly 154,000 MFDs as of October 2024, the number of RIAs remains under 1,000.

The Size Conundrum

“We largely work in smaller towns, catering to retail customers in tier II and III cities… when you work with small customers, RIAs do not make any sense,” says Kothari.

From an RIA perspective, they need clients of a certain size to be commercially sustainable. Kothari explains: “For a Rs 1-crore client, an MFD receives an annual commission of Rs 60,000, calculated at 60 bps per Rs 100, while an RIA gets a fee of Rs 20,000 at 20 bps. However, for a client with a Rs 5-lakh investment, the commission of 60 bps per `100 charged by an MFD amounts to Rs 3,000, whereas the 20 bps as RIA fees is about Rs 1,000. Doing all this work for Rs 1,000 a year doesn’t make sense.”

In addition, an RIA, as per Sebi rules, is permitted to charge a fixed fee of up to Rs 1.25 lakh or up to 2.5% of assets under advice for their services. However, RIAs typically charge around 0.20-1.25% to their large clients.

People’s reluctance to pay separately for advice in India also contributes to the popularity of MFDs, driving customers away from RIAs. “The penetration of financial products and MFs is still relatively low in India. In a nascent market, there’s resistance to paying separately for intangible advice, making it easier for intermediaries to earn through commissions,” says Sapna Narang, Managing Partner at Capital League, a Gurugram-based wealth management firm.

“The RIA model is suitable for HNI/UHNI investors. For retail investors, the MFD model is more suitable,” says Himanshu Kohli, Co-founder of Client Associates, a wealth management firm.

Under the Lens

To safeguard investors, Sebi has introduced tougher guidelines for finfluencers. Now, Sebi-registered entities like brokers and MFs are prohibited from associating with unregistered finfluencers.

However, the distinction between advice and education offered by finfluencers is often blurred. Sharan Hegde is one of the first finfluencers to secure an RIA licence through a subsidiary company (rather than in his own name). In just three months after launching his financial advisory services, he attracted 160 clients. This highlights the high demand for professional financial advice.

Hegde may serve as a test case. “The virtual RIA model is like a robo-advisory platform where set guidelines dictate investment outcomes. It’s a pseudo-layer between pure DIY investing and a human approach, with a virtual assistant to help investors,” says Mohit Gang, CEO and Co-founder of Moneyfront, a Mumbai-based investment platform. “In a market like India, where the number of clients could be in lakhs or millions and product outcomes could vary greatly, a virtual approach might just be an approximation and yield proper outcomes,” he adds.

So, will other finfuencers jump on the bandwagon and pursue an RIA licence? Doubtful! “I do not want to be in Sebi purview. There are so many dos and don’ts, and it makes the business complicated for us. I do not want to be an MFD or an RIA; I just want to be an educator,” says a leading finfluencer on the condition of anonymity.

Way Forward

When new players enter a field, it’s common to allow the market to grow before introducing regulations. However, regulations were established first for RIAs, creating many restrictions. “It’s like being asked to play football on a basketball court; it doesn’t work,” says Navlakhi. Nonetheless, things are changing now. “Sebi is now more of a facilitator, rather than a strict enforcer. They are engaging with us frequently and listening to the realities on the ground,” he adds.

But there is no denying that highly qualified advisors should handle complex products, and clients should have specific knowledge of the products.

Moreover, experts say further flexibility is needed in fee collection. “Customers want different fee models, like hourly or profit-sharing. Moreover, the fixed fee cap of Rs 1,25,000 doesn’t make sense for high-value clients. For instance, a client with `10 crore might be willing to pay a higher fee for personalised service, but the current regulations don’t allow this flexibility,” explains Navlakhi.

Moreover, RIAs are prohibited from collecting fees in advance for more than six months, even for annual contracts. Fee collection, according to Navlakhi, needs to be simpler to address this pain point.

Sebi introduced strict fee regulations to curb abuses by stock tip providers. Experts suggest that moving RIAs into a different regulatory category could simplify the rules for genuine advisors. Data on complaints and enforcement actions against RIAs reveals that most issues arise from trading call providers (see chart ‘Plaint facts’).

These entities specialise in issuing “buy” and “sell” calls, particularly in the high-risk futures and options segment.

Unless the regulator addresses these challenges, RIAs will continue to have limited presence. Perhaps this is why Hegde chose to concentrate primarily on the education sector, where he believes revenue could increase by 100% by FY25.

In fact, “it has the potential of a `500 crore business, but growing the RIA business to `500 crore is next to impossible. Imagine needing 1,000-2,000 financial planners. We don’t have that many in the country. Managing 2,000 employees and ensuring quality is very difficult, so clearly, there’s a scalability problem,” Hegde had told BT before Sebi’s paper was released.

Hopefully, the proposed guidelines will bridge the gap and encourage more advisors to join the profession.

@teena_kaushal