Nudging the distributor

Here is what a preliminary study of the new SEBI Investment Advisers regulations reveals

At last, SEBI has come out with the much awaited investment adviser regulations. As the first set of regulations created specifically for distributors, there were expectations that these regulations would tackle issues such as conflict of interest arising out of their dual role of ‘advisors’ to clients and ‘agents’ of representatives.  In this context, this is what a preliminary study of the regulations reveals.

Dilution   

When compared to the Concept Paper circulated in September 2011, the final regulations seem to have been watered down in a few substantial areas. To begin with, there should have been a clear demarcation between those who represent client interest and those who represent manufacturers’ interest, as was envisaged in the Concept Paper. In the final regulations, this demarcation has been addressed obliquely at best and is not clear enough. 

Further compounding this ambiguity is the issue of whether distributors who do not register as Investment Advisers continue to use titles which imply that they provide advice and other services similar to Investment Advisers. To a lay person, titles such as financial advisors, wealth advisors, financial planners, investment consultants, financial consultants etc. mean the same as Investment Advisers. While in the Concept Paper, every one other than the Financial Advisors (now called Investment Advisers in the final regulations) was to be called agents only, the final regulations is silent on the titles  that non-Investment Advisers can use.

Majority of distributors out of purview

The vast majority of distributors will continue to be out of the purview of these regulations. The list of exempted categories leaves out a vast majority of distributors. Further, with the filter of education/experience, certification, net worth etc. it can be safely assumed that only a small section of the distributor can exercise the choice to be Investment Advisers.

Finally, even those distributors who meet the criteria to be an Investment Adviser, will have to evaluate the pros and cons of registering. Given the current ground reality, on a purely rational cost-benefit basis, it does not make a strong business case for a distributor to opt to be an Investment Adviser.

By exempting such a wide range of distributors, life will remain unchanged for a majority of investors and distributors.  Moreover, what could, however, emerge is that some individual distributors will work out an arrangement (on the lines of banks & corporate distributors) with an associate or family member where one can function as an Investment Adviser and the other as a distributor. Or else, distributors will run a hybrid model, collecting commissions from AMCs and wherever possible ‘transaction’ or ‘service’ fees from clients who are willing.

Nevertheless, the regulations could yet be the starting point of a new chapter in Indian financial services:

1.     It will benefit everyone if there is greater awareness created about the regulations.This way, investors will see merit and value in dealing with Investment Advisers registered with SEBI. If more investors are seen to be willing to pay fees, there will a stronger incentive for other distributors to turn Investment Advisers, creating a virtuous circle.

2.     Instead of taking educational, experience and certifications as a surrogate for expertise, it is better to conduct a single but more stringent examination by a body such as NISM. This will open up the field to more distributors while ensuring quality at the same time.

3.     From a branding perspective, being a SEBI registered Investment Adviser could be a huge differentiator. The implicit ‘endorsement’ of quality and integrity will bestow a big advantage to Investment Advisors.

4.     Over the years there has been a big shift in how distributors view their own role and responsibilities towards their clients. Most distributors recognise the need to align their business model to client interests. By nudging them in the right direction through the right mix of incentives, encouragement and regulations, the transition to the alignment can be smoother and faster.

The ultimate proof of the effectiveness of these regulations will be when the vast majority of clients served by these Investment Advisers feel that their financial matters are in safe hands. 

Business case:  Investment  Adviser vs. Other distributor

*Not precluded for other distributors – while investment advisory fee may not be allowed, fee such as transaction/service fee is allowed) 

 This article had appeared originally in Mint on January 28, 2013