As an investor you would probably be shocked to know that India is short of investment advisers. Your bank manager calls often to offer free ‘financial planning’ services. A good number of your neighbours are agents (the insurance, not espionage, variety) keen to update you on the newest pension plan. There are scores of helpful strangers who send you SMS tips on plans that double your money.
It was all this unsolicited advice that prompted the Securities and Exchange Board of India (SEBI) to formulate a new set of regulations for investment advisers earlier this year. The new regulations, which came into effect last week, lay down elaborate rules to ensure that investment advisers are qualified and professional and that they avoid conflict of interest and opacity in their dealings with clients. The only problem is, the rules apply only to registered investment advisers.
SEBI’s new regulations require that everyone who is in the business of offering investment advise register with the regulator. The deadline for this registration was October 20. But the surprising thing is with the deadline already over, SEBI has received only 70 applications from all over India. Of these, it has granted registration to just 11 individuals and firms who are now qualified to call themselves ‘investment advisers’.
What about the rest? Well, they have all chosen to remain outside the ambit of the new rules and thus aren’t ‘investment advisers’. Instead, they will remain product vendors, agents or distributors.
It is necessary that you, as an investor, take note of this, because it is unlikely that a financial services company or intermediary will tell you about it.
IT’S NOT ADVICE
But what has happened to the scores of individuals and firms who have been drowning me in unsolicited investment advice — you may ask. Well, they have chosen not to call themselves professional ‘investment advisers’ for many different reasons.
First, there are the 83,000 mutual fund distributors registered with the Association of Mutual Funds of India and the 22 lakh life insurance agents recognised by the Life Insurance Council. The majority of these agents have not sought registration with SEBI because they believe that they are exempt from the regulations.
Life insurance agents are supposed to be regulated by IRDA. As to AMFI-registered distributors, SEBI’s new rules exempt them if they offer advice ‘incidental’ to their primary activity. Distributors are probably grateful for this escape hatch because their main source of income today is the commission they earn from the mutual funds whose products they sell. Should they become qualified ‘investment advisers’, they would be forced to forego these commissions and instead charge a fee from you, the investor.
To avoid conflict of interests, SEBI’s regulations do not allow investment advisers to earn any income from the companies whose products they recommend. Given that a fee-based advisory model isn’t very prevalent in India, agents do not want to put their revenues at jeopardy by becoming investment advisers.
SEBI also specifies certain qualifications for registered investment advisers, which quite a few of these agents may not meet. Hence, they have simply decided to continue as ‘distributors’.
ONLY INCIDENTAL
Then there are chartered accountants, lawyers, auditors and other professionals who do sometimes offer advice but are exempt from registration because this is only ‘incidental’ to their business. These professionals probably have nothing to lose by registering, because they already charge a fee from their clients.
Yet many of them are probably reluctant to take on the fiduciary responsibilities cast upon advisers by SEBI’s new regulations. If they register, they may have to devote far more time than they do now, to conducting due diligence on financial products, risk profiling clients and monitoring clients’ portfolios. They too have thus chosen not to register.
But what of the brokers, sub-brokers, fund managers and experts in media who talk at length on markets and offer stock tips? Well, they’re not deemed ‘advisers’ by SEBI because they’re only offering general opinion and are therefore exempt from registration.
So, with most of the people who currently offer investment advice not covered by the new regulations, it is up to you, the investor, to fend for yourself. The next time your bank calls up with a free financial plan or your neighbourhood agent knocks at your door, ask these questions to know whether you’re getting genuine advice. Is he a registered investment adviser? And if he is, what is his advisory fee?
If you want good advice, cough up his fee. If he doesn’t ask for it, think hard about whether you should really act on his counsel.
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