SEBI has come out with the fourth consultation paper on Registered Investment Advisors (RIAs) in which it has proposed allowing individual RIAs to offer distribution services to their clients along with fee based advisory services.
If you are considering becoming RIA to start charging fees along with distribution services, here is the ready reckoner to help you understand opportunities and challenges of the new proposals.
Transition from MF distributors to RIA
Opportunities
- The best part is that you can keep your existing clients under commission model and offer fee based financial advisory services to your new clients
- Client segmentation based on their willingness to pay i.e. commission or fees
- Can charge up to 2.5% on AUA irrespective of asset class, which is much higher than the commissions paid by fund houses. There is an option to charge flat fee of up to Rs.75,000 per annum from clients. While this model may not be lucrative for large ticket clients, it would work well for other clients
- One side benefit is that the requirement for RIAs to have succession planning will benefit them
- Since there are requirements like keepings records of clients communication, clearly defined scope of engagement and so on, it will eventually help you set up a credible business practice
Challenges
- Net worth requirement of Rs.10 lakh
- Necessarily shift to corporate structure (Rs.50 lakh networth) for RIAs having Rs.40 crore AUA or more than 150 clients within six months of achieving this scale of business
- Criteria to become RIA is having 5 years of experience, post-graduation degree in finance or relevant field or profession certification like CFP, CFA. The criteria is applicable for your employees too
- Higher cost of compliance and operations
Existing RIAs
Pros
- Have an option to offer execution services
- Level playing field with banks and national distributors
- Can charge fee of up to 2.5% on AUA
- Clearly defined scope of engagement
- Requirement of putting in place succession planning can help you plan the future of your business
- Since your clients will have to enter into an agreement to receive your services, chances of default on fee payment by clients reduce
Cons
- Cap of Rs.75000 on fixed fee model is not viable. Cannot execute both models – AUA and fixed fee. Currently, a few RIAs charge fixed fee for financial planning and fee on AUA for ongoing advisory services
- Your family members cannot hold ARN i.e. RIAs cannot offer execution services through separate arm. RIAs having separate distribution arm through family member will now have to obtain their own ARN and transfer assets to the new ARN to service existing clients
- SEBI defines family as group of clients. RIAs cannot charge a fee for financial advice from father and offer execution services to his son even if such clients want it
- Compulsory shift to corporate model once business reaches a certain scale. That means, higher license fee and networth requirement
- Have to recommend direct plans only but no clarity on products, which do not offer direct plans like AIFs
- Stringent qualification for employees
Conclusion
While there are a few positives like creating level playing field, succession of business and incorporation of agreement to safeguard advisors, maintaining capital adequacy of Rs.50 lakh, compulsory shift to corporate model and capping of fees in fixed fee will only benefit large RIAs like banks and NDs.
