Risk profiling is even more critical for advisors

In this digital era, despite the burgeoning number of robo-investing platforms, investors continue to reach out to financial advisors.  This is because many investors are

• Uncomfortable sharing their data over robo-advisory platforms
• Want more clarity on investment products and avenues
• Look forward to handholding by advisors

But, more importantly, investors are seeking proficient honest and transparent advice.

For financial advisors to grow their practice, working in a righteous manner in the interest of their clients’ financial wellbeing is necessary, always! The advice should be rendered after conducting a need-based analysis, where the risk profile of client should not be ignored.

In a recent circular dated December 27, 2019, SEBI has toughened its stance for the welfare of the investors at large.

The circular based on observations states that RIAs should have to comply with the following.

Observation #1: It has come to light that RIAs are providing advice on a free trial basis without considering the risk profile of the client.

Measure to comply: Restriction on a free trial

RIAs cannot provide a free trial for any products or services to prospective clients. Further, RIAs cannot accept part payments (advance fees) for any products or services.

As per SEBI (Investment Advisers) Regulations, 2013, investment advice can be given after completing risk profiling of the client and ensuring the suitability of the product.

Observation #2: RIAs aren’t conducting proper risk profiling nor taking the clients’ consent on risk profiling.

Measure to comply: Proper risk profiling and consent of the client on risk profiling

It is essential to provide advice on a suitable product based on various criteria like income, age, securities, market experience, etc. RIAs are therefore required to provide investment advice only after completing the following steps:

• Complete the risk profile of the client based on information provided by the client
• Obtain the consent of the client on the completed risk profile either through registered email or physical document

Observation #3: RIAs receive an advisory fee in the form of a cash deposit in their bank accounts or through payment gateways, which does not provide a proper audit trail of fees received from the clients.

Measure to comply: Receiving fees through banking channel only

To bring transparency in dealing with the clients, RIAs can accept fees strictly by account payee crossed cheques/demand draft or by way of direct credit into their bank account through NEFT/ RTGS/IMPS/UPI. The regulator has clarified that RIAs cannot accept cash deposits.

Observation #4: The status of complaints pending and resolved is currently not visible.

Measure to comply: Display of complaints status on the website

In order to bring more transparency and enable the investors to make an informed decision regarding availing of advisory services, RIAs will have to display the following information in the given format on the homepage (without scrolling) of their website/mobile app.

(Source: SEBI circular)

The information above should be displayed properly using a font size of 12 or above and made available on a monthly basis within 7 days of the end of the previous month.

The measure referred above come into effect from January 01, 2020. The intent is to strengthen the conduct of RIAs.

Conclusion

When the above measures are effectively implemented in true nature and full spirit, it would protect the interest of investors and help make more informed investment decisions.

Understanding client’s financial history, present circumstances, risk profile and their financial goals are very important to make their journey of wealth creation enlightening and meaningful.

Financial advisors should place the interests of his clients at the fore, always! This ultimately builds a healthy client-advisor relationship, earns trust, respect, and love of clients and helps retain the business.