SEBI has been working for you, the investor, and how
SEBI has been pushing the pedal on protecting your, the investor’s, interest. It has taken several steps to eliminate conflict of interest between your adviser/distributor and you. This is specially true for mutual funds.
As a first step, in 2009, it banned upfront commissions on sale of mutual fund products.
Then in 2013, on its behest, mutual funds introduced direct plans of all their mutual fund schemes. In my view, this was the best thing to happen. Direct Plans means no commissions paid out to anyone and all the resultant savings adding up to an investors returns.
In contrast, regular plans are sold by distributors where they receive regular commissions as a % of the marked value of your investments.
Further, in the same year, that is 2013, SEBI also introduced the Investment Advisers (IA) Regulations 2013.
Simply put, any advisor who is offering one to one investment advice to investors related to securities, etc. must register as an Investment Adviser.
As per SEBI Investment Adviser regulations, “investment advice” means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or though any other means of communication for the benefit of the client and shall include financial planning.
Did you know this?
Here are some more facts about Investment Advisers
- SEBI Registered Investment Advisers cannot take any commissions (direct or indirect) on any products that they recommend to the clients. Their only compensation is the fee that you directly give to them for the advice.
- All the Investment Advisers have to make relevant disclosures to the clients about any possible conflicts and any other consideration or remuneration that they receive or could receive incidental to the advice they provide to you.
- The Investment Advisers also have to maintain extensive records of their advice and interactions which is subject to audit by SEBI itself.
All this has one purpose – to ensure that you, the investor, is not put at a disadvantage and are not a victim of conflict of interest. The advisor has to serve you. By ensuring that you directly pay the fee to the advisor, the regulation aligns the interests of the advisor and the client.
Also read: Why I became a fee only financial planner and SEBI Registered Investment Adviser?
For some time, SEBI was lenient, hoping that the current advisors would understand the intention of the regulation SEBI.
It also allowed the mutual fund distributors to carry on their business as usual and receive commissions on your investments. The distributors are also allowed to offer advice incidental to selling mutual funds but not comprehensive advice across assets or do financial planning.
Of course, you did not pay any fees to these distributors, hopefully. Distributors are compensated through commissions paid out by various products including the Mutual funds which they sell to you.
Through a recent circular, SEBI mandated Mutual Funds to disclose to the investor, any and all commissions that are paid to distributors from your mutual fund investments.
This was a step towards greater transparency. You now know, through the half yearly CAMS statement, how much you are paying and for what advice and service.
It’s been over 3 years and SEBI now wants to take the next step in the regulation.
SEBI wants to evolve Investment Advisers Regulation
It has come out with a consultation paper to address some of the shortcomings in the previous Investment Advisers regulation and thus make it stronger and better.
The consultation paper is in the public domain. Currently, the people who are accessing it are the distributors and the advisers. They are the ones who are pointing out the gaps, the problems and how can it be improved.
The fact of the matter is that the regulation is as much about you as it is about them. Yes, while SEBI is doing its job of protecting your interest, I am sure it can benefit from your inputs too. You see you are the final consumer of the advice and not SEBI.
I have hardly seen any investor views, that is your views, on the consultation paper.
For your benefit, I am listing down a brief summary of what the paper says. I would request you to go through them and share your comments, feedback on the same.
After all, it is going to impact you too.
So, here are the proposed changes in the Investment Advisers regulation that probably matter to you:
- Take advice from Investment Adviser – As an investor, SEBI says that you should seek investment advice only from a Investment Adviser registered with SEBI and not a product distributor.
- How would you know a Registered Investment Adviser (RIA)? Only those persons who have registered under the IA regulations, can call themselves as an Investment Advisor. Every RIA has a registration number with a validity. This can be verified on SEBI’s website as well.
- Make an agreement – You have to sign an agreement or Terms of Service with your adviser where he clearly specifies what is the scope of service, period, products covered, any other rights and obligations, etc. The adviser also disclosed all conflicts of interest to the client. The rights and obligations have now been expanded to reflect all of the above.
- Fees – You should pay fees directly to your adviser only and discuss the same in advance. This could be a flat fee, an AUM based fee or a performance fee. The fee has to be paid only through an official banking channel and not cash.
- Execution Services – Investment Advisers (Individuals) cannot offer you execution services. You are also under no obligation to execute or buy the investment products through its referred persons or organisations. You are free to do it yourself or go to any platform of your choice.
- Mutual Fund Distributors will not offer investment advice of any kind. They can at best tell you product specifications but no more an MF portfolio or which funds to buy or sell. As in Point no. 1, only Registered Investment Advisers can offer investment advice.
- Termination of Services – You can quit the service of your adviser by giving a 30 day notice period. The adviser can do the same too.
- Tips – Any investment advice offered through phone calls, SMS and social media channels will be banned unless the entity offering it is registered with SEBI.
- Complaints – You can complain against the services of your Adviser at SEBI’s portal – SCORES.
There are many more that you can read in the detailed SEBI note here.
If you understand the crux of it, SEBI is making it clear that Advice and Distribution are separate functions and should remain so. You, the client, should not be put to any disadvantage because of any conflict of interest caused by incentives. Any product that is recommended to you has to be suitable to the your profile.
My sense is that over time, SEBI wants to eliminate any commission based selling in financial products and thus the underlying agency problem.
It’s time to make your voice heard
Okay, now that you have read and understood the above regulation changes, I urge you to share your opinion/feedback/comments.
Do you support SEBI’s intention to eliminate commission based selling altogether and the fees be charged directly to investors for advice and other services?
As the affected party from these regulations, what can SEBI do make this work for you in a better way?
To get you started, here are 2 things that I would like you to specifically comment on:
- KYC – Currently, SEBI wants Advisers to do a separate KYC that includes taking a PAN copy, Address Proof and other relevant details. As you would know a Central KYC repository is being put in place, which will allow agencies to access your KYC with your approval. Would you recommend that Investment Advisers use the this facility to access your KYC? You will save the pain and not go through the whole process again.
- Execution – Currently the regulation says that an individual Investment Adviser cannot offer execution services. Would you like your Adviser to also offer you execution in commission free products? For example, Advisers can help you to invest in direct plans of mutual funds, online or offline. Since direct plans pay out no commission, there is no conflict of interest here. It also allows the Investment Advisers to offer an integrated service to you including planning, execution and monitoring.
The regulation is evolving and this is your opportunity to help shape it up.
Let your views be known to SEBI so that a more rounded regulation that incorporates your views too, emerges.
You can share your views directly with SEBI by sending an email with your suggestions to sebiria@sebi.gov.in.
There is a format in which you would like to apply. Here’s the link to the detailed consultation paper and the format from SEBI.
If you want, you can share your recommendations with me and I will forward your notes to SEBI.
Don’t miss it. It matters to you.
Please note: Financial Products such as NPS and Insurance are outside the purview of SEBI and regulated by PFRDA and IRDA respectively. Banks are regulated by RBI but that part of the bank’s activity, which pertains to Investment Advisory has to follow SEBI’s regulation.