The Securities and Exchange Board of India (SEBI) has limited the scope of securities/investment products on which investment advisors (IAs) can give their advice, essentially acting in an advisory capacity and providing holistic advice to clients. affect the ability.
SEBI has recently said in a guidance letter that Registered Investment Advisors (RIAs) cannot earn commission by recommending Fixed Deposits (FDs) to their advisory clients.
The move comes after Guardian Capital Investments sought informal guidance from the regulator on various advisory aspects.
“If the regulator reduces the role of what IA can do, the growth of the IA industry will be hit,” said a lawyer for a private law firm, speaking on condition of anonymity.
Suresh Sadagopan, Managing Director, Ladder7 Wealth Planners Pvt Ltd said, “SEBI has not barred IA from advising on FDs, but clarified that advisors should not take commission from such products.”
Guardian Capital, a registered investment advisor, informed SEBI that, looking at the interest rate scenario, the company found that FDs of some banks and NBFCs offer better interest rates than debt-based mutual funds . They make better investment recommendations for clients looking for debt investments. However, no such FD is available in the regular mode of investment.
“In this scenario, it makes more sense for us to advise FDs with regular mode of investment so that customers are not overcharged (as there is no option of lower direct charges by the bank). For such products, can we mentor a consultant customer with regular mode and earn commission from the product manufacturer, as it is more friendly to the customer?” it asked.
The regulator replied that the IA would only advise the schemes (non-commission based) directly on the products and not on the regular mode.
These plans allow a customer to purchase products directly from the financial services company’s websites, while a regular plan is one that an individual purchases through an advisor, broker or distributor. In a regular scheme, the mutual fund company pays a commission to the intermediary. It is then recovered from the plan as an expense.
Under SEBI’s Investment Advisors Regulation 2013, registered advisors have assumed a fiduciary responsibility. This means that the RIA will need to act in the best interest of the client.
“One of the concerns is that right now we need products that are commission free. At present, FDs, bonds and non-convertible debentures are not covered by SEBI. SEBI cannot direct other regulators to come up with non-commission-based products. However, SEBI is now working towards a super-regulator wherein all things that come under the purview of financial services will come under a single regulatory framework.”
The investment advisory firm also asked SEBI whether advisory services like financial planning can be provided without any charges to the delivery clients.
SEBI said the IA should ensure to segregate the advisory and distribution clients before engaging them.