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RIAs cannot earn commission by recommending FDs to their advisory clients, SEBI has clarified in an informal guidance to an RIA.
The RIA, Guardian Capital Investment Advisors, had sought SEBI's views on the matter saying that it would be cheaper for clients if RIAs take commission from the manufacturers rather than charging a fee from them to recommend products like FDs.
In a letter to SEBI, the RIA had explained that since there are no direct FD plans, clients will earn the same returns whether or not RIAs take commission. However, the returns will go down if RIAs refuse the commission and charge fee directly from clients.
In response, SEBI said RIAs cannot opt for such a setup as it goes against the rules. Citing a circular dated September 23, 2020 which states that 'IA shall, wherever applicable, advice direct plans (non-commission based) on products only', SEBI said that RIAs can advise only direct plan products to their clients.
'Advisory clients can continue to hold investment in regular plan'
The RIA had also sought to know if pre-April 2021 (when client level segregation circular came into force) distribution clients can become its advisory client while continuing to hold the pre-April 2021 regular plan investments.
SEBI responded that while RIAs will have to do client level segregation between their advisory and execution services, investors who invested under regular plans before implementation of the new rules have discretion to hold such assets.
"In terms of the IA Regulations, it is mandatory for the non-individual investment adviser to maintain a client level segregation and the same client cannot be offered both advisory and distribution services within the group of the non-individual IA in view of the regulation 22(3) of the IA Regulations. Further, clients shall have the discretion to continue to hold assets prior to the applicability of the aforesaid provision, under the existing advisory/distribution arrangement with the IA," the regulator said.
