RIAs feel the recent SEBI guidelines on advisory business is a mixed bag. While there are certain compliance challenges in the near term, the fact that there is finally clarity on a lot of aspects is a good thing for the advisor fraternity. Moreover, some of the regulations may go a long way in enhancing transparency and standardization of advisory business in the interest of investors, feel advisors.
SEBI registered investment advisor Kavitha Menon said that the recent circular has standardized some of the practices in the advisory business. For instance, having a similar format for the letter of engagement is a welcome step as it helps in setting the right expectation between the advisor and the investor.
On the norm that an individual RIA can only manage 150 clients, Kavitha said this might lead to RIAs limiting their services to HNIs. “I feel an individual RIA can serve more than 150 clients with the help of technology. But now that the regulator has put a cap on the number of clients, individual RIAs may opt to limit their services to HNIs. If someone does not want to corporatize their advisory business, another option is to become an associate with national distribution platforms.”
Nevertheless, some experts believe that despite the compliance challenges and cap on clients as well as fees structure, RIA model remains lucrative as against commission model. According to the new regulations, RIAs can charge either up to 2.5% of the AUA or a maximum of Rs 1.25 lakh from a client. In comparison, a distributor can usually earn 0.80% commission if his clients’ assets are in equity schemes.
RIAs feel that certain regulations such as maintaining records of interactions with clients in physical or electronic form for at least 5 years can be a challenging task in some cases. They fear that recording interactions with clients may make the clients uncomfortable or stop them from revealing many details.
However, Vishal Dhawan, Founder, Plan Ahead Wealth Advisors clarified that while RIAs will now have to maintain an audit trail of conversations even for prospective clients, and this doesn't necessarily mean recording all phone calls. Keeping some form of record like signed minutes of the meeting or email from registered email id will suffice.
Meanwhile, some of the corporate RIAs said that adhering to the new guidelines will not be a huge challenge for them. DilshadBillimoria of Dilzer Consultants said, “We were already adhering to compliance requirements such as letter of engagement, maintaining records of conversations with clients, client segregation and so on. So we hope to have a smooth transition to the new regulations.”
