In its reply to an Indore based RIA, SEBI has clarified that RIAs cannot charge profit-sharing fee.
Through a guidance letter, the market regulator has told MarketMagnify Investment Adviser and Research that linking advisory fees being charged to the profit/loss generated by assuming that the clients have acted upon the advice, is not envisaged by the existing framework of IA regulations.
Earlier, MarketMagnify which is primarily engaged in intraday advisory services, had sought clarification from SEBI if they can charge fee on profit sharing model. The company had also asked the regulator whether they can charge variable fees (profit sharing) on prepaid model and refund if anything goes wrong with the portfolio.
To this, SEBI clarified that an investment adviser is not responsible to make good the losses incurred by the client if such loss is caused due to inherent market risks and not due to negligence of an adviser.
The market regulator has also clarified that RIAs need not enter into any legal agreement while providing investment advisory to their clients. However, RIAs are expected to maintain records of advice.
Further, SEBI has clarified that the fee charged from the client should be fair and reasonable. However, SEBI has not defined the quantum of this ‘reasonable fee’.