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MF News ‘In the era of direct plans, advisors need to offer a better value proposition’

‘In the era of direct plans, advisors need to offer a better value proposition’

In an e-mail interview with Cafemutual, Shyam Sekhar, Founder, iThought, a SEBI-registered investment advisory firm, talks about what it takes to be an RIA.
Team Cafemutual Nov 13, 2017

What preparation did you do to register with SEBI as RIA?

We need to develop a regulation compliant process. We have put in place systems to address all the needs of RIA regulation involving people, capital and process.

Why do you think that Indian investors are mature enough to pay fee for financial advice?

In my view, conventional sales approach does not offer differentiation and better experience to clients. Interest alignment between the advisor and advised is not clearly established in such a model.

Through RIA model, advisors have the opportunity to deliver a better investment experience, provide interest aligned advice, manage the investment process continuously and deliver continuously on risk management. A fee is a small cost to pay for investment competence, process integrity and knowledge delivery. I believe that investors are willing to pay if we can deliver on these metrics. Getting the model right is central to charging fees.

Is the process of registering complex? If yes, what difficulties did you face?

The process of registering is not complex. We have to ensure compliance with regulatory norms on well-established criteria. A well-prepared and carefully verified application will be registered in reasonable time. We did not face much difficulty and we appreciate that the regulator was thorough in its process.

What ambiguities/roadblocks did you come across in SEBIs Investment Adviser Regulations?

The regulation is now possibly being updated and a consultation paper is in the public domain. We should see how the newer regulations help make the process of registration simpler and speedier. The current mechanism is elaborate and can be simplified.

Some areas like asking RIAs to do KYC can be done away with as the mutual funds and stock exchanges have elaborate mechanism. This is unnecessary duplication of KYC process.

SEBI has announced 400% hike in the registration fee for LLPs, firms and corporates. Do you think the increase in fee would deter IFAs to register with SEBI?

The fee hike does not affect individual RIAs. However, a lower fee will help corporate entities to come forward and register. There is price sensitivity as the fee based advisory practise in India is still in its nascent stage.

What are the benefits of registering with SEBI as RIA?

Registration as an RIA brings enormous discipline, improves processes, ensure compliance, brings interest alignment and provides credibility.

Financial advisors can continue to charge fee (for making plans, account maintenance etc.) and earn trail fee even if they do not register with SEBI. Why should one register with SEBI?

Investors weigh and prefer the prospect of dealing with SEBI registered advisors. Also, to grow a business and scale, we need to provide a well regulated, regulation compliant model of advisory. In the era of direct plans and zero-brokerage stock broking, we need to offer a better value proposition.

What are your views on the cost of compliance with SEBI's RIA rules?

There are significant costs involved. A low fee-paying advisory model will struggle to meet the costs.  This makes scale very essential. We believe that compliance requirements are inevitable though the regulator could simplify the systems and procedures in future to bring in more advisors into the RIA fold.

Only 700 have registered as RIAs so far. What are the reasons for a majority of IFAs to not register with SEBI?

The fear of getting their new advisory model right and the comfort with the existing revenue model that gives predictable cash flows are the main reasons.

SEBI's RIA rules require IAs to have Rs.25 lakh net worth. What are your views on capital adequacy requirement?

This is not very high. Capital adequacy is merely to ensure that only well capitalized entities enter the business. This ensures they sustain and serve customers.

What would be your advice to IFAs who are considering registering with SEBI as RIA?

This will help to create strong goodwill for the business, put us one a sound footing versus larger organizations like banks and national distributors. Client acquisition will also be a lot simpler as the client knows that you are system - regulated and does not have to worry about interest alignment.

 

 

5 Comments
Prashant · 1 week ago
Sorry but this person just wants to be good in SEBI's eyes and that is why is saying all mishy mushy things. Please ask him if he has distribution license under his wifebor any family person's name so that he doesn't lose on either model?
Jaideep · 1 week ago
As an IFA, I am mystified by the regulator and now RIA's refrain of "conflict of interest". I have yet to come across professions where the advisory and transactional persons are different. I have not seen a corporate sales person recommending a competitor's product, for example, because, like an IFA, he works for a livelihood first and then for his customer. That apart, I do not understand why, firstly if my investments are only in my client's name and secondly, the performance of the investments are not in my control, what do I need a net worth of Rs 25 lakhs for ? Maybe SEBI should instead insist on indemnity insurance by IFAs/ RIAs, rather than the net worth, that may be a better option.
Harsh · 1 week ago
Make all the existing IFAs appear for an RIA exam and then allow them to obtain an RIA license as per the process and documents & net worth requirements.
Give total freedom to these qualified advisors to work on a commission or fee model.
A country like India should always support Free markets to get the most efficient results over the long term. Somewhere, the “short term” fears of SEBI forces it to take “short term” fixes like supporting one pricing model over another.
It’s time that even SEBI starts thinking long term & follows the concept of “Free Market” economy in Letter and most important in spirit.
Harsh · 1 week ago
The perception of regulators, that Commisions based sales lead to bad advice & selling of bad products itself is questionable as most of the so called commission earning products (close ended products) are less than 10% of total industry AUM.

In the medium to long term, every advisor gives good advice as otherwise his/her business is unscalable & unsustainable. That’s how market forces work against a mis seller & eventually makes him/her pay. So there should not be any over regulation that discourages genuine players (most common of the lot) from abandoning his/her practice by mandating just one model of pricing their services.

At best, the regulator should allow an “All Trail” only model to weed out the mischievous lot of distributors that have the potential to damage the industry.
G.Dijendranath · 1 week ago
Clients of a IFA/RIA will be glad to pay for advice if they can get periodic reports regarding the true state of their investments. The performance of the schemes in their portfolio against benchmarks and what is the percentage contribution of each scheme to the total. The performance of the managers who run their funds versus their peer group. And importantly the impact of the advice that they get and Its contribution whether positively or negatively. All this can be achieved by a simple tool like Value Express.
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