Suresh Sadagopan of Ladder 7 Financial Advisories shares his experience of being a SEBI registered Investment Advisor.
What preparation did you do to register
with SEBI as RIA?
We have been into financial planning for a long time. Many of the things that have been required by regulation were already being done by us. There were many other measures which we needed to take - comprehensive documentation, arm’s length dealings, getting KYC of clients, risk tolerance analysis etc.
Is the process of registering complex? If yes, what difficulties did you face?
There were ambiguities as well as unknown aspects of the regulation. Hence, I just made a complete disclosure of what I have been doing and what I intended to do in my application itself. Once I had done this, it was up to SEBI to go through my application and accept or reject it. The application form and the documents sought were not very difficult to comply with.
What ambiguities/roadblocks did you come across in SEBIs Investment Adviser Regulations?
There is some confusion in arm’s length/ segregation between advisory practice and execution. This was the main problem area. We hence established two separate entities for advisory & implementation (we don’t do distribution in the typically understood sense; this other entity is just a dedicated implementation partner for those who choose to implement the plans we have created through us). Our office, staff, resources and ownership are separate. We disclose to clients as a potential area of “conflict of interest” about the implementation entity at the beginning both orally & in writing in the letter of engagement.
SEBI has announced 400% hike in registration fee for LLPs, firms and corporates. Do you think the increase in fee would deter IFAs to register with SEBI?
I feel that it is too early to hike the fee. SEBI should in fact play a more enabling role. They should catalyse the establishment of RIAs and the fee increase is a step in the wrong direction.
Many small entities have been registering a private limited company as they wanted to segregate their business and get into advisory practice. The fee now is at such a level that only big entities can afford to pay.
What are the benefits of registering with SEBI as RIA?
I feel that many of the things which SEBI is asking us to do are actually good for the practice in the long term, though it does impose certain costs. Also, the public at large would know that RIAs are those who have chosen to comply with regulation and have come to advisory space and are dependable.
Financial advisors can continue to charge fee (for making plans, account maintenance etc.) and earn trail fee even if they don't register with SEBI. Why should one register with SEBI?
Many have not understood the regulations correctly. As long as they deal with mutual funds only and nothing else and give advice only in that, it is fine. But one cannot make a financial plan and give advice only through mutual funds.
If one is dealing in more than one area – say, mutual fund & insurance, they will have to register as an RIA as their advice can take the client money from one area to the other and can have implication for clients. Hence they would have to be registered.
Even CAs / lawyers can give incidental advice only in their domain areas – not across the board. CA can suggest tax saving plans and lawyers can help in estate planning.
Those who want to offer proper advisory will have to register. There is no sense in ducking this. The future is advisory and those interested should register instead of finding excuses and loopholes.
What are your views on the cost of compliance with SEBI's RIA rules?
As it is, documentation, auditing, compliance & staffing costs will go up due to the regulation. The cost from SEBI side should be kept low. In that context, Rs.5 lakhs registration fee for corporate is unnecessarily high.
Only 156 have registered as RIAs so far. What are the reasons for a majority of IFAs to not register with SEBI?
Many are on a wait and watch mode. Some are in denial. Some are so used to distribution income that they would like to stay clear of being an advisor and continue as they are. But the evolving situation across the globe is such that there will be more and more compliance be it in advisory/distribution. It is good to anticipate these and make them work for us rather than being in denial.
SEBI's RIA rules require IAs to have Rs. 25 lakh net worth. What are your views on capital adequacy requirement?
Probably SEBI has kept this for corporates to ensure that if there is ever a claim from the client, the IA has the wherewithal to pay. I would not say the capital adequacy of Rs.1 lakh and Rs.25 lakhs for individual / corporate is very high.
What kind of due diligence you have to undertake after being an IA?
KYC document collection, risk analysis, suitability documentation, storage of client information etc. are important now. Auditing is now mandatory for the process we follow as an IA. Like I had said earlier, overall it is good for the practice and our clients.
What would be your advice to IFAs who are considering registering with SEBI as RIA?
Advisory is the future. Leverage your existing knowledge and client base to make the transition. We need to recognize the changes happening in the financial services space and act wisely. The writing is already on the wall. IFAs have to see it and make the right moves.
