SEBI has asked individuals to either become registered investment advisors (RIAs) to offer fee based services or opt for mutual fund distribution model to charge commission.
Further, the market regulator has clarified that there will be no client segregation at individual RIA level.
On fees, SEBI said that it would issue separate guidelines to give details on modes of charging fees, periodicity and so on.
Among the key changes are:
- Mutual fund distributors are no longer allowed to use nomenclature like ‘independent financial advisers’ (IFAs) and ‘wealth managers’ without registering with SEBI as RIA
- Individuals will have to choose between fee model and commission model. Further, individual RIAs are not allowed to offer distribution services through family member
- However, individuals opting for investment advisory model are allowed to offer execution services but they cannot receive commission in lieu of such services. That means, even if a product class doesn’t offer direct plan, RIAs will have to ensure that they do not make any money out of it
- Non-individual RIAs i.e. advisory firm/ company can offer both – advisory and distribution depending on their clients
- RIAs will have to enter into a formal agreement with clients before offering any services
- Net worth requirement for individual RIAs and non-individual RIAs is Rs.5 lakh and Rs.50 lakh, respectively
- Individual RIAs or principal officer of advisory firm/company should have minimum qualification of post-graduation in relevant subject and 5 years of experience in relevant field. Existing RIAs will also have to qualify for this eligibility to continue their advisory business
- Such criteria is relaxed for RIA employees to having 2 years of relevant experience, post graduate and NISM qualification
- Individual RIAs having more than 150 clients have to compulsorily re-register as corporate. This means, they will have to increase their net worth from Rs.5 lakh to Rs.50 lakh
These amendments will come into force on October 2, 2020.
Vishal Dhawan of Plan Ahead and member of Association of Registered Investment Advisers (ARIA) believes that the market regulator wants to promote corporate model of advisory. “Compulsory shift to non-individual model by maintaining such a high capital adequacy requirement will be difficult for boutique advisory firms. On the other hand, getting into a formal agreement is a welcome move as this will increase transparency.”
Further, Vishal points out that RIAs cannot deal in products where direct plan is not available. “Currently, only mutual funds offer direct plan and soon PMS will offer direct plan. However, there is no way individual RIAs can advise on other products which do not offer direct plans as they are not allowed to receive commission.”
Sharing his views, Suresh Sadagopan of Ladder7 Wealth Advisories and member of ARIA said, “Shift to corporate set up once an advisor reaches certain number is not viable for many RIAs. Such a shift can happen if an advisor has revenue of say at least Rs.5 crore. Also, such a move can limit growth of advisors who want to continue fee based model.”
Jayant Vidwans, of Vidwans Financial Planners believes that RIA model is no longer viable. “Individuals will have to choose between advisory model and commission model. They cannot offer both. Also, SEBI will soon come out with regulations on fees. In such a scenario, it will be difficult for many individual RIAs to continue with RIA model.”
