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Guest Column The New Financial Advisor World Order – SEBI Investment Adviser Regulations 2013

The New Financial Advisor World Order – SEBI Investment Adviser Regulations 2013

SEBI has finally released the much awaited regulations for Investment Advisers (IA) after a slew of other regulations to combat mis-selling in markets and related services.
Biharilal Deora Jan 30, 2013

SEBI has finally released the much awaited regulations for Investment Advisers (IA) after a slew of other regulations to combat mis-selling in markets and related services.

 

Here are a few highlights of the regulations and their likely impact

Definition of Financial Planning : According to the new Investment Advisers (IA) regulations  “financial planning shall include analysis of clients’ current financial situation, identification of their financial goals, and developing and recommending financial strategies to realize such goals”.

 

FPSB India defines Financial planning on its website as “a process of meeting your life goals through the proper management of your finances. Life goals can include buying a house, saving for your child's higher education or planning for retirement”.

 

Now clearly the regulatory definition makes one think if it also includes advice relating to taxation, insurance, retirement, estates and wills. Does that mean, a financial planner can still advise its client on all these aspects and charge a fee without coming under these new regulations?

Code of Conduct: Interestingly enough, the Investment Advisers (IA) Regulations also prescribes a separate Code of Conduct for Investment Advisers which apart from honesty and fairness, also talks about fair and reasonable charges. It says an investment adviser advising a client may charge fees, subject to any ceiling as may be specified by SEBI, if any. The investment adviser shall ensure that fees charged to the clients is fair and reasonable. 

What is the definition of fair and reasonable fees? Will it be based on assets or hours or number of of people  in a family? This can have widespread implications and undesired effects as well as conflicts on what is the price for  quality advise. Will each Investment Adviser sign an annual compliance stating he has adhered to the code or otherwise remains to be seen.

 

Risk profiling and Suitablity : The regulations make it mandatory to carry our initial and periodic risk assessment for all clients including their ability and willingness to take risks.

 

Suitability is defined as a recommendation or transaction entered into which meets the client’s investment objectives; is such that the client is able to bear any related investment risks consistent with its investment objectives and risk tolerance and is such that the client has the necessary experience and knowledge to understand the risks involved in the transaction. 

This provision will require the clients to at least sign a declaration of understanding of the the product and agreeing to the risk assessment and advise. Whether this becomes paperwork like typical insurance examples of 6% and 10% remains to be seen.

 

Other issues : A Individual Applicant also needs to produce apart from other things, details of any disciplinary actions/other offenses against them  in last 5 years and a copy of CIBIL report. They also need to submit a declaration that they shall not obtain any other remuneration from clients except advise fees. Professional bodies including SEBI need to put  a system in place where a potential client can check the disciplinary history for advisors.

Overall, this regulation is meant to avoid mis selling and making advisors responsible and liable to clients on what they advise.  How many individual investors will benefit out of the regulations remains a question that only time will answer.

The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.

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