Only a handful of advisors are operating on a pure fee based model.
Two years after SEBI RIA regulations came into effect, only 200 have registered themselves as RIAs.
There could be multiple reasons for this low registrations - lack of awareness among advisers, stringent compliance, high costs, ambiguity regarding arms length/Chinese Wall clause, etc.
In a dipstick survey carried out by Cafemutual in tier II cities, we found that almost 80% IFAs were unaware about SEBI RIA regulations. Also, stringent compliance norms after registration deter IFAs to take the plunge. Another reason cited by advisors is that the fee which they would earn as RIA would not suffice to cover their cost of operation.
Moreover, many advisers fear that investors may not be ready to cough up fee for advice. Although some distributors have transitioned to charging fee for advice, a vast majority of them continue to depend on commissions from AMCs.
According to a story done by The Mint Newspaper recently, of the total 200 odd RIAs, 100 are corporates who have their own distribution arm to execute transaction. The report said that 50 RIAs are those who have both fee-based and trail-fee model of earning. Majority of them have carved out a separate entity to execute transactions. Cafemutual found that some RIAs have also either empaneled or in a process of empanelling with distributor platforms like FundsIndia and iFast.
We asked SEBI RIAs whether operating on a pure advisory model is viable in India.
Vishal Dhawan of Plan Ahead Wealth Advisers says that fee only model is not lucrative for advisers having a large client base. “Advisers having large client base cannot work on pure fee model. A lot of clients ask for execution services as well. As a financial adviser, we have to give complete financial solutions to clients.”
Another hurdle behind not registering for RIA is unavailability of data of direct plans. A Mumbai based RIA said, “It’s difficult to keep track of investment details if a client invests through a direct plan. Such details are required to review the portfolio. Currently, these details are not available with AMCs or AMFI. Also, if I am investing time and resources on clients, what’s wrong in getting trail commission?” Vishal too pointed to the constraint of unavailability of data of direct plans.
MS Shabbir of SenSage Financial Services feels that fee only model is not practical in India. “Indian market has not matured yet. Firstly, most people are not ready to pay fee, especially AUM based fee. Only those clients having investible corpus of close to Rs.10 lakh have shown propensity to pay a reasonable fee. Retail investors who want to start an SIP of Rs. 5,000 per month cannot pay fee. Also, it’s not fair to charge fees from such clients.”
“Despite being registered as advisers many RIAs retain their distributor identity. There is no honest attempt at running a successful advisory business which in my view is very myopic and merely a show to gain credibility that comes with SEBI registration,” said Kavitha Menon, a SEBI registered RIA from Mumbai.
In a column published today in ‘The Mint Newspaper’, Suresh Sadagopan of Ladder7 Wealth Advisories has said, “Most feel that collecting fees from clients is not easy, and would prefer to retain their brokerages. But, at the same time, they also want the respect that an adviser gets. So, they would like to keep the income and also become advisers. In this context, many are finding the regulations difficult as the meagre fee they may be able to collect does not justify the cost and efforts incurred to segregate the business. This is the one principal reason that deters potential candidates from becoming advisers.”
A Bangalore based RIA said that advisors are preparing for the change. “I think industry is in a transition phase. If you recall, SEBI had banned entry load in 2009. After a few years, it reduced trail commissions. Now, the regulator is mulling a ban on upfront commissions. I believe trail income will be reduced to 0.5% of AUM within next five years. As rightly said by H N Sinor, CEO, AMFI in an interview with Cafemutual, AMCs will be phasing out commissions in future. Advisors who run business on a combination of fee and commission have already understood this fact and have started changing their business model.”
However, a few advisors have a different opinion. Prakash Praharaj of Max Secure FP believes that it will take time for fee only model to take off in India. “Though current market conditions are not viable for RIAs to operate purely on fee based model, I believe it will take off in a big way five years down the line. However, RIAs have to work on building expertise in key areas like estate planning, tax planning etc. apart from enhancing product knowledge. Also, RIAs need to make people aware about financial advisory services and explain them what value-add they can bring to the table for a fee.”
Let us know your thoughts.
