SEBI plans to lower investment advisors' entry bar

India's financial services landscape may see the entry of more professionals offering investment advice, with the market regulator SEBI proposing to relax some of the severe restrictions that have stunted the sector so far.

Lower eligibility criteria, zero networth requirements, and easier fee regulations are among many proposals the market regulator hopes will attract more individuals to be registered investment advisors (RIA) and research analysts (RAs). The measures, proposed in a consultation paper released in early August, aimed to encourage formal routes to financial information and check the rise of unregulated financial influencers on social media.

Graduates can become advisors 

Currently, aspirants for RIAs and RAs must have at least a post-graduate degree; this may be lowered to graduation. These professionals must now renew their National Institute of Securities Market (NISM) certification every three years; in the future, they may have to secure additional certification only for the changes in three years.

SEBI has also proposed to scrap the requirement of prior experience to be an RIA or an RA since key executives of asset management companies who also handle retail money do not face any such requirement.

SEBI proposed removing the networth requirement for RIAs and RAs as their services are fee-based and they do not manage clients' funds and securities. However, they will be expected to maintain a deposit lien market to a stock exchange that recognises them. The deposit amount will be based on the number of clients handled by RIAs and RAs— ₹1 lakh for up to 150 clients, ₹2 lakh for 150-300 clients, ₹5 lakh for 300-1,000 clients and ₹10 lakh for more than 1,000 clients.

Fee norms to be relaxed

RIAs and RAs presently charge fees under two modes—assets under advice (AUA) mode (limit of 2.5% of AUA a year for a family of clients) and fixed fee mode (limit of ₹1,25,000 a year for a family of clients). If they wish to change the mode, the same can be effected only after 12 months since the last change of mode.

Sebi proposed to do away with this method and give flexibility to RIAs and RAs to charge fees without a minimum period restriction.

SEBI  has proposed to permit individuals and partnership firms to seek registration for providing services as both RIAs and RAs, subject to compliance with rules and regulations. The paper proposed to demarcate the scope of investment advice of an RIA to a specific product belonging to an asset class falling within the regulatory purview of Sebi or other financial regulators.

SEBI also proposed that RIAs and RAs using artificial intelligence tools for servicing clients will be required to disclose the extent of the use of these tools to their clients. Additionally, the responsibility for data security and compliance with regulations would lie solely with RIAs and RAs.

 ‘Research analyst’ and ‘research services’

SEBI said only those who provide research services “for consideration”, which means any form of economic benefit, will be considered research analysts. The research services by an RA shall be corroborated by a research report containing relevant data.

It plans to exempt proxy advisors (PA) from the ambit of the Research Analyst Administration and Supervisory Body (RAASB) as the nature of the services of PA is different from RA. A PA will now be under the supervision of SEBI directly. 

The maximum fees that an RA can charge are proposed to be brought at par with RIAs; that is, ₹1,25,000  in the case of individual clients.

The limit on fees chargeable by RAs will not apply in the case of non-individual clients, including clients who are qualified institutional buyers (QIBs), accredited investors, and institutional investors seeking the recommendation of a PA.

`Very positive'

Harsh Roongta of FeeOnly Investment Advisors Llp, said on the face of it, the SEBI paper appears to be very positive. “This is going to be a big boost to the profession, and entry barriers have been dismantled. A clear segregation between the ‘one to one’ and ‘one to many’ services in the field, removal of networth requirements on non-individual RIAs, allowing part-time RIAs, and allowing dual registrations as RIA and RA are the centrepiece of the consultation paper,” he said.

Suresh Sadagopan, a registered IA, said lowering the eligibility criteria is welcome and allows more people to come in. “Doing away with networth requirement is also a welcome provision as this was a huge stumbling block for those who wanted to transition from Individual to corporate IAs,” he said.

He said the new category called part-time RAs may result in all kinds of people becoming part-time IAs like architects, lawyers, or doctors. 

An RIA provides advice to clients for investments in securities or investment products based on risk profiling of clients. An RA provides security-specific buy/sell/hold recommendations or gives price targets to its clients/subscribers not customised for the needs of a specific investor or client.

The markets regulator had constituted 16 working groups to recommend simplification of various Sebi regulations and compliance requirements. The regulator has released a consultation paper and invited comments from the public on the proposed recommendations till 26 August.