In its fourth consultation paper on Registered Investment Advisors (RIAs), SEBI has proposed allowing individual RIAs to offer distribution services to their clients along with fee based advisory services. This will be in line with corporate RIAs who currently offer both the services to their clients. However, individual RIAs will have to obtain a new ARN to offer this service.
In addition, their clients (existing and new) can decide if they want distribution services or fee based services from an RIA. Simply put, RIAs cannot offer both the services – advisory and distribution to a client or a family. SEBI defines family as group of clients. That means, RIAs cannot charge a fee for financial advice from father and offer execution services to his son. Also, RIAs offering advisory services will have to recommend direct plans only.
Vishal Dhawan of Plan Ahead and member of Association of Registered Investment Advisers (ARIA) said that the move would help mutual fund distributors who want to become RIA. “So far, many distributors fear that their existing clients would not prefer paying fee to them for financial advice if they migrate to fee based model. This new proposal, if goes through, resolves this issue as they can charge fee from new clients and continue to offer distribution services to their existing clients.”
Seconding Dhawan’s view, another member of ARIA Suresh Sadagopan of Ladder7 Financial Advisory feels that this would benefit existing RIAs and clients. “The new proposal on client segmentation based on distribution and advisory and introduction of execution services would create a level playing field between individual RIAs and corporate RIAs.”
Another key proposal is putting a cap on fee. RIAs can charge up to 2.5% on assets under advisory (AUA) as advisory fee and offer fixed fee of Rs.75000 per annum irrespective of ticket size. Also, RIAs can charge up to half-yearly fee as advance fee.
Dhawan believes that flat fee model is not viable for advisors. “A flat of Rs.75,000 per annum is not viable for RIAs. Hence, in my view, most RIAs would opt for ‘percentage of AUA’ model.”
“While a cap of 2.5% on AUA is more than sufficient for RIAs, flat fee option is clearly not viable. In addition, SEBI has proposed that we can only receive advance fees of up to 2 quarters. However, the market regulator is silent on collecting the remaining fee after six months. What if client does not pay me my remaining fees after six months, what is the mechanism to recover fees and who is going to bear loss if any,” said Sadagopan.
Among other key proposals are:
- Net worth requirement of Rs.10 lakh for individual RIAs and Rs.50 lakh for corporate RIAs. Existing RIAs have three years to comply with this net worth requirement. Also, individual RIAs having Rs.40 crore AUA or more than 150 clients has to compulsorily re-register as corporate RIA within six months of achieving this scale of business. This means, they will have to increase their net worth from Rs.10 lakh to Rs.50 lakh. Dhawan said that maintaining such a high capital adequacy requirement will be difficult for boutique advisory firms
- Clients will have to enter into an agreement to receive services of RIAs. Such a document should seek clients consent on fee structure and mechanism for charging fees, validity of advice and so on
- RIAs will have to appoint a nominee in case of death or disability
- Para planners of RIAs have to be well qualified and experienced
- Maintain records such as physical record written and signed by client, telephone recording, email from registered email, record of SMS and so on
- RIAs will have to complete the compliance audit within three months from the end of each financial year
SEBI has invited comments from all stakeholders. You can send your feedback at sebiria@sebi.gov.in latest by January 30. 2020.
