What is the new proposal regarding segregation of financial advice and distribution in the latest SEBI discussion paper?
The discussion paper clearly states that you can either charge a fee on financial advice or get commission on MF distribution. You will no longer offer both financial advice and execution/distribution.
If you are an individual Registered Investment Advisor (RIA), you will not be able offer any distribution/execution service through a relative or by setting up a separate company/division or entity. Nor can an individual distributor offer financial advice through a relative or by setting up a separate company/division or entity.
The same principle applies to corporate bodies. They will not be able to offer both financial advice and distribution even through subsidiaries, associates or divisions.
If you are providing distribution services through separate subsidiary or person, can you continue to do this?
If the proposed regulations is implemented, RIAs both individuals and corporates like banks cannot provide execution services. In fact, the existing RIAs offering such services through immediate relatives or through separate division will have to choose between providing investment advice or distribution before March 31, 2019.
If an RIA wants to be a MF distributor. Can he surrender the RIA licence?
Yes, an RIA can surrender it with SEBI. Once you surrender your RIA license, you will have to appear for NISM examination to apply for ARN with AMFI.
As a mutual fund distributor, what services can you provide to my clients?
- MF distributors can only talk about mutual fund schemes.
- Distributors cannot provide financial planning services such as risk profiling, financial goal setting, to their clients.
- Distributors will have to disclose the commission they earn.
- Distributors will have to clearly explain to their clients why a product is suitable for them.
Can a mutual fund distributor use nomenclature like IFA?
No one can use nomenclature like ‘independent financial adviser’ (IFAs) and ‘wealth managers’ without registering with SEBI as RIA. Individuals who opt to continue with the current model of commission can only use the nomenclature ‘mutual fund distributor’.
Can a mutual fund distributor continue to distribute other third party products such as insurance and pension fund?
There is still ambiguity on this. However, mutual fund regulations do not restrict distributors from selling other financial products subject to the respective regulatory approvals.
What will happen to the commission on your existing business, if you choose to become an RIA?
Distributors who opt for RIAs can continue to get trail commissions on existing AUM. However, they have to disclose this to their clients.
What is the fee structure to become an RIA?
Distributors who want to float investment advisory business through body corporate licence will have to maintain a net worth of Rs.10 lakh and cough up Rs.10,000 as application fees and Rs.1 lakh as registration fees for the initial five years. Currently, body corporates have to maintain net worth of Rs.25 lakh and pay an application fees of Rs.25,000 and registration fees of Rs5 lakh for five years. However, the subsequent registration fees for such RIAs would be Rs5 lakh after five years.
For individual RIA licence, distributors will have to pay Rs.5,000 as application fee and Rs.10,000 as registration fee for the five years.
What happens to the previous consultation paper on RIA rules?
SEBI has given clarification on segregation of financial advice and distribution in this recently issued circulation paper. We assume that the other proposals of the previous consultation paper would remain applicable.
