Can an individual RIA segregate advisory and distribution activities?
No. Individual RIAs are not allowed to offer distribution services to their clients and receive commission income at all.
In other words, individual RIAs are not allowed to offer both – advisory and distribution activities and do client level segregation. Even if your client choose to avail implementation services, they will have to approach other entity i.e. outside family or group.
SEBI has allowed only corporate or non-individual RIAs to continue to carry out both advisory and distribution activities. However, their clients (existing and new) can decide if they want distribution services or fee based services. Simply put, corporate RIAs cannot offer both the services – advisory and distribution to a client or a family. SEBI defines family as dependent spouse, dependent children and dependent parents. That means, RIAs cannot charge a fee for financial advice from father and offer execution services to his son.
What if an individual RIA’s family member’s runs MF distribution business?
Such an RIA has to either give up his SEBI RIA license or MF ARN of his family member. SEBI does not allow RIAs to offer execution services through family member. Family member includes spouse, children and parents.
While SEBI norms allow individual RIAs to offer execution services through extended family members like brother, nephew and so on, it will be against the spirit of the law.
Can an individual RIA offer execution services to track investments of clients?
Yes, individual RIAs can offer execution services related to products in securities markets but they cannot charge any fee or receive commission or consideration from the manufacturer.
Also, RIAs offering advisory services will have to recommend direct plans only.
But what about other products where there is no direct plan?
Since SEBI doesn’t regulate other financial products like insurance, corporate FDs and so on, it is understood that RIAs can receive consideration by distributing other financial products which are not related to capital markets. However, it will be against the spirit of the law.
What about usage of nomenclature like IFAs or wealth manager?
No person can use nomenclature like ‘independent financial advisers’ (IFAs) and ‘wealth managers’ without registering with SEBI as RIA. In addition, no person can devise any other similar names like independent financial intermediaries (IFI) without checking with SEBI.
Are existing RIAs required to fulfil eligibility criteria to continue to offer advisory services?
Yes, existing RIAs will have to fulfill eligibility criteria within three years. Currently, individual RIAs or principal officer of advisory firm/company should have minimum qualification of post-graduation in relevant subject like finance, accountancy, business management banking and so or a professional qualification like CFA and 5 years of experience in relevant field.
Such criteria is relaxed for RIA employees to having 2 years of relevant experience, post graduate and NISM qualification.
In addition, RIAs will have to ensure that they hold certification on financial planning, fund, asset, PMS or investment advisory services from NISM or CFP. There will be no CPE exam for RIAs. They will be required to obtain fresh certification every three years.
Existing RIAs who are 50 years of age and above may be exempted from complying with revised rules.
Is there any AUM criteria to become non-individual RIA?
No, SEBI has clarified that individual RIAs having more than 150 clients have to compulsorily re-register as corporate. There is no AUM specific criteria to meet this requirement.
What would be the fee model for RIAs?
The recent circular does not give any details on fee model of RIAs. SEBI said that it would issue separate guidelines to give details on modes of charging fees, periodicity and so on.
However, sources privy to the development said that SEBI may increase the proposed cap on fixed fee for registered investment advisers (RIAs) from Rs.75,000 to Rs.1.25 lakh per annum per family.
The market regulator may also allow RIAs to follow percentage on AUA model where they can charge up to 2.5% on AUA irrespective of asset class from a family. However, RIAs may have to demonstrate AUM with supporting documents like demat statements, unit statements and so on.
Family includes individual, spouse, dependent children and dependent parents.
Further, RIAs can follow any one model on an annual basis. Also, RIAs can change fee only after 12 months of advisory services. In addition, RIAs can charge advance fee for up to 2 quarters with an option to refund if investment advisory service is discontinued. RIAs can retain fee of up to one quarter from clients in case of termination of contract.
Let us know if you have any other query related to SEBI Investment Advisor Regulations.
