Advice and execution are interlinked and cannot be separated, say advisors
SEBI has taken the initiative for regulating the distribution of mutual funds. As a first step, it seeks to distinguish between those who provide advice for a consideration and those who provide execution/referral/distribution.
To start with, SEBI will directly register and regulate investment advisors. SEBI describes investment advisors as those
- Entities whether individuals, body corporate or partnership firms engaged in the business of providing investment advice to investors for consideration. Such entities cannot offer distribution, execution or referral services.
- Who are remunerated by the client only.
- Who meet certain criteria on qualification, experience and net worth.
Distributors, as of now, are exempted from these regulations, although they will be regulated through a self-regulatory organization (SRO) in future..
Financial planners say that one cannot separate ‘investment advice’ and ‘execution’ because advice ultimately means recommending certain products in order to achieve client’s goals. Hence they would prefer to operate as both ‘investment advisors’ and executors of financial plans.
“Financial planning’s ultimate goal is to convince clients to invest in certain products to achieve a goal. Investment execution is an important part of financial planning. One needs to monitor the portfolios in-house. It is in the interest of both advisors and investors. It could happen that clients after enrolling for a financial plan may derail from the plan or redeem their investments. Thus monitoring and execution should very much be in our control,” says Pankaj Mathpal of Optima Money Managers.
Most financial planners currently advice and execute plans so that they can actively monitor and rebalance portfolios. Buying products through a distributor after getting advice from investment advisor would only compromise on client’s goals, they say. Thus, they would prefer to have a separate division in their company which will only execute transactions. SEBI has said that ‘bank or body corporates which also offer distribution, execution or referral services will be required to offer investment advisory services through a subsidiary or a Separately Identifiable Department or Division (SIDD). Such a SIDD will be required to be clearly segregated from other activities,” states the SEBI circular. Some say that financial planners could form a private limited company if they currently operate as proprietorship firm in order to act as both ‘investment advisors’ and ‘distributors’.
If regulations don’t permit financial planners and distributors to don dual roles the transition will be difficult. “Under the proposed investment advisory regulations, a lot of focus will be on the fiduciary responsibility of an investment advisor. Given this context, the investment advisors will have to put in a lot of effort in establishing their fiduciary standard in the eyes of their clients. Today, most of the ARN holders run a hybrid model. Business transition could take time for many established advisors who have large assets under advise, but for many others, who are just off the block and already running a pure play advisory model, and for those established advisors who are fully clear in their minds that investment advisory is the way forward, registration as an investment advisor is going to be an enabler to their next business leap. For them, overall, projecting oneself as investment advisor regulated by SEBI will play an important role in expanding their business. Intermediaries will have to make a choice over a period of time as to which model suits them – and it could very well be a hybrid model! We need to wait for SEBI’s final guidelines to see a few important things with respect to registering as an investment advisor – the fit and proper criteria and also what does ‘body corporate’ include – as the body corporate can have a separate identifiable division to provide execution services besides investment advisory,” says Rajesh Krishnamoorthy, Managing Director, iFAST Financial.
If investment advisors are not allowed to form two divisions under one company, most would prefer to be agents. If they opt to act purely as investment advisors, this could mean parting with a substantial chunk of trail revenue. It could happen that SEBI may allow trail to be given on existing assets for investment advisors. However, they’ll have to make sure that they generate enough revenue from fees in future to make good trail commission if they wish to operate as investment advisors.
Today, few people operate as pure financial planners. Some operate on a hybrid model in which they make financial plans for few clients and act as distributors for others. Some, under a distribution, model have started to command a fee based on the assets under advisory.
