SEBI Registration

Why are there Few Registered Investment Advisors in India?

Over time, the Indian financial sector has emerged as one of the top areas to invest in and increase wealth. Yet, because the financial markets frequently respond to these and other circumstances, the value of investments may change. Investors may be obliged to take losses on their initial investment if the market responds unfavourably to market variables. As a result, investors can invest in defensive companies that continuously increase over time without much price fluctuations if they want to place their money in less volatile equities and get consistent income through dividends.
Investors must therefore possess an in-depth financial knowledge of these market factors to ensure their investments’ continued profitability. Since retail investors make up the bulk of investors, acquiring such financial expertise becomes difficult for them. Investors can significantly benefit from Registered Investment Advisors in this situation. These advisers ensure that their clients make the best investments possible and that all transactions are open and transparent.

Registered Investment Advisor

A person or organisation that offers “investment advice” to another person in exchange for money is known as an investment advisor. Financial planners, financial advisors, investment advisors, portfolio managers, and tax savings advisors are just a few of the functions that investment advisors do. 

According to the SEBI (Investment Advisers) Regulations, 2013^[1] (the “SEBI Regulation”), an investment advisor must register with SEBI in order to conduct advising activities. According to SEBI Regulation, no one may represent themselves or function as an investment adviser unless they have a certificate of registration from the SEBI.

No one may use the terms “Independent Financial Adviser,” “IFA,” “Wealth Adviser,” or any other name that is similar while engaging in the distribution of securities unless that person has registered as a Registered Investment Advisor (or “RIA”) with the SEBI. Hence, registration is required to engage in investment advisory activities.

Eligibility Requirement for Registration as an Investment Advisor

Education qualification  

The following minimum qualifications must always be met by an individual investment adviser or a principal officer of a non-individual investment adviser: 

• A professional qualification, or a post-graduate degree, or a post-graduate diploma (of at least two years duration) in finance, accounting, business management, economics, commerce, capital market, insurance, banking or actuarial science from an institution or a university recognised by the Central Government or any State Government, a recognised foreign university, association, or institution, or a professional qualification by completing a post-graduate programme in the Securities Market From NISM of a time period not less than one year or qualified professionally by obtaining a CFA charter from the Institute.
• A minimum of five years of experience in operations related to funding, asset, portfolio, or securities management advice.

The minimum requirement for a person associated with investment advice:

• Professional qualification as described above.
• An experience of at least two years in activities related to advice in financial products or securities, fund, asset, or portfolio management.

Individual investment advisers and principal officers of non-individual investment advisers and persons associated with investment advice are required to maintain certification in financial planning, fund management, asset or portfolio management, or investment advisory services:

• From NISM, or
• From the Financial Planning Standards Board of India, or any other recognised stock exchange in India, provided the certification is accredited.

The reason for few registered investment advisors in India

The number of SEBI registered investment advisors (RIAs) has remained more or less stagnant over the past few years, despite the fact that the number of investors has increased significantly. Let us examine the reason for a few registered investment advisors in India.

• SEBI increased the qualification standards. All individual investment advisors are required to hold a post-graduate degree and at least five years of relevant professional experience. For many, this became a hindrance.
• Even though they have a good degree, an experienced person’s application is being turned down because they need to meet one of the requirements for offering financial advice, which is job experience. The updated rules now demand both where the earlier guidelines need education or work experience.
• Also, it is now required for qualified advisors to retake the advising certification exam every few years. Before, in order to maintain the validity of their licences, they had to provide evidence of their continuing education credits by attending seminars, conferences, and so on. Every time for renewing the certification, one should still be required to take the same back-to-basics exam. For knowledgeable advisors, it is pointless. It is a significant issue and is equivalent to expecting a doctor to give all his exams every other year to keep practising medicine.
• SEBI sets the maximum fees that RIAs may charge. Also, as individual advisers reach 150 clients, they must transition to company status. Pursuing this RIA strategy will be more difficult without a bigger net worth of Rs. 50 lakhs. Distributors avoiding investor adviser registration is not unusual, given the higher entry barrier to being an RIA nowadays is a significant issue.
• For instance, MFDs were permitted to charge advisory fees (only for the most minimal guidance they could provide) and make commissions from mutual funds by marketing schemes all under one roof. But RIAs were not permitted to receive distribution commission income unless they were non-individuals with a distinct department.
• The fees are the second red herring. The message only states that the fee will need to be collected in accordance with the board’s rules. The board minutes, however, stipulate a fixed charge with a ceiling of Rs. 1.25 lakh per year or a variable cost of up to 2.5% per year of the assets under advisory (AUA). Only 50% of the costs, or six months’ worth, may be levied and paid upfront. A year cannot have fixed and variable fees running simultaneously.

Agreements between clients and Registered Investment Advisors

RIAs must sign an agreement on investment advisory services with every client to guarantee openness. The criteria, norms, and conditions that must be included in the investment advisory agreement are outlined in the SEBI circular dated September 23, 2020, even though SEBI does not specify the format of the agreement in that document.

Fees to be charged from clients  

The maximum fees allowed by SEBI for Registered Investment Advisors are as follows:

• 2.5% of the assets under advice (AUA) per family annually or 
• INR 1,25,000 per household annually.

While charging the client, RIAs may select any one of the aforementioned modes. Only 12 months after the client’s onboarding or the most recent change may the mode be changed. Fees must only be paid to RIAs via banking methods.

Registered Investment Advisors general responsibility

• An RIA must act in a fiduciary capacity for its clients and disclose any conflicts of interest as they develop. 
• An RIA is also prohibited from receiving any payment, remuneration, or compensation from a source other than the client for whom advice is given regarding the underlying securities or products. 
• An RIA is also required to maintain an arms-length relationship between its activities as an investment adviser and any other business dealings.
• An RIA shall follow the Know Your Client procedure as specified by the SEBI from time to time. 
• An RIA shall not knowingly act on its own account to sell securities or investment products to or purchase securities or investment products from a customer.
• An RIA involved in activities other than investment advice services must ensure that its other operations are clearly separated from its investment advisory services. 
• The SEBI’s prior consent is necessary if the change in control in RIAs occurs.

Conclusion

Getting a SEBI Registered Investment Advisors licence has many advantages. On the other hand, because RIAs possess the high qualification, certificates, and experience requirements and stringent norms handled in issuing licenses by the SEBI, there are few registered investment advisors. Fewer investment possibilities are available when wealth is little, and the need for financial planning is also less. More income, however, necessitates sophisticated financial planning. As a result, we need a lot more competent investment advisors. In the interests of everyone, including IAs, SEBI must address the issues. It will be beneficial for the entire investor community.

Also Read: SEBI Registered Investment Advisors vs Stock Broker vs Dealers