The Securities and Exchange Board of India (SEBI) on Tuesday released a consultation paper to review the regulatory framework for Registered Investment Advisers (RIAs). Among the notable proposed amendments are the relaxation of educational qualifications from a post-graduation degree to a graduation degree, the elimination of prior experience requirements, and the removal of the minimum net worth criterion for individual RIAs.
RIAs advise on various SEBI-registered investment products. Unlike a distributor who earns a commission, RIAs charge a fee from their clients, which can either be a fixed fee of up to Rs 1.5 lakh or up to 2.5% of Assets Under Management (AUM).
The rationale behind these proposals is to make the profession more accessible to a broader range of individuals. By lowering the entry barriers, SEBI aims to diversify the talent pool and potentially increase the number of advisors in the country. "Reducing the educational threshold could attract more individuals , while eliminating the experience requirement may open doors for young, talented advisors. I definitely see a multifold increase in the number of RIAs in the country,” said Lovaii Navlakhi, chairperson of the Association of Registered Investment Advisors (ARIA).
It has been 11 years since SEBI issued guidelines for Investment Advisors, yet the number of RIAs in the country remains low. There are only 995 RIAs registered with BSE Administration & Supervision Ltd. (BASL), which oversees SEBI advertising guidelines.
The industry has welcomed new proposed changes, however, SEBI has put certain areas off-limits for RIAs. For example, under the proposed guidelines, RIAs cannot advise on international products where investments are made in foreign currency. “The proposed regulation is a very good start. However, RIAs cannot advise on international products. We can only advise on products where investments are made in rupees because SEBI is not legislating foreign currency,” said Navlakhi.
Source: Sebi
"Thus, as observed from the above matrix, persons providing investment advisory services/ research services are required to obtain certificate of registration as IA/ RA from SEBI if they intend to provide investment advisory services/ research services in relation to Indian securities to investors based in India or NRI or PIO," as per Sebi's consultation paper.
Similarly, RIAs cannot charge fees for estate planning because it is not under SEBI’s jurisdiction. SEBI could be a little more liberal with these provisions, added Navlakhi.
"These unregulated products and services (real estate, gold, estate planning, tax planning, etc) may have complex and non-transparent structures, hidden fees and may not be subject to same level of scrutiny as regulated products. There may not be clear disclosure of the risks while investing in these products/availing such services. The relationship of investment adviser has a fiduciary duty towards its client and it would be difficult to ascertain the potential conflict of interest in case of unregulated products and services. Further, there shall be limited or no recourse to the investors in case of any grievances. Potential legal action in case of unregulated products and services may have implications for an investment adviser that may not be dealt with within the securities laws," as per Sebi's consultation paper.
Other Proposed Relaxations for RIAs
Currently, RIAs need to get NISM-Series-XA and XB certifications when they register. They also need to renew these certifications before they expire to maintain their registration. RIAs have expressed concerns that having to repeatedly obtain the same certification to keep their registration active creates uncertainty and disrupts business continuity. Now, SEBI has proposed that RIAs only need to obtain a certification based on the incremental changes or developments during the previous three years.
Similarly, individual/partnership firms earlier needed a minimum of Rs 5 lakh of net worth. Now, under the proposed law, there shall be no requirement of any net worth for IAs and RAs. For non-individual RIAs, the amount of deposit to be maintained is based on the number of clients. For example, it is proposed that for up to 150 clients, Rs 1 lakh net worth is required; for 150 to 300 clients, Rs 2 lakh; for 300 to 1,000 clients, Rs 5 lakh; and for 1,000 and above clients, Rs 10 lakh. The relaxation is given as the RIA business model is based on a fee model.
RIAs can either charge a fixed fee of up to Rs 1.5 lakh or up to 2.5% of AUM for their advisory services. Currently, any change of mode, if any, can be effected only after twelve months of onboarding/last change of mode. “In order to offer more flexibility in charging fees, it is proposed to allow IAs to change the fee mode for a client at any time, without restriction on the minimum period between two fee mode changes. The maximum fee that can be charged by the IA shall, however, not exceed the higher of Rs 1,25,000 per annum per family or 2.5% of AUA per annum per family,” as per SEBI’s consultation paper.