SEBI Limits Investment Advisor Fees to Advisory Services 2023
The Securities and Exchange Board of India (SEBI), the apex regulatory body for the securities market in India, has once again made its stance clear on the charging mechanisms adopted by investment advisors.
As per its latest mandate, investment advisors can only charge fees for providing advisory services and not for Portfolio Management Services (PMS). Let’s delve deeper into this directive and understand its implications for both the advisors and investors.
Portfolio Management Services (PMS) refers to the tailored investment services offered to individual high net worth investors.
The portfolio manager makes investment decisions on behalf of the client, with the primary aim being capital appreciation.
The chairman of the Securities and Exchange Board of India (Sebi), Madhabi Puri Buch, argued persuasively for separating investment counselling from money management. She stated that 35% of investment advisors (IAs) in India are unregistered in her speech at the Association of Registered Investment advisors (ARIA) conference.
According to the BSE, membership registration of the BSE Administration & Supervision (BASL) is a mandatory requirement for all IAs registered with the Sebi.
According to the Sebi website, there are about 1,300 IAs registered with the regulator. The BASL has about 900 registered members. While she advocated for the addition of 1 million IAs, she also noted that they should only offer investing advice and not trading calls, and that they should be registered and compliant.
“Sebi has observed investment advisors operating a 500-person call centre with a single registration.” I’m not sure how many individuals they helped commit suicide, she added, adding that advisors ought to try to talk clients out of trading F&O.
Buch stressed that the regulator was aware of all unethical practises, including IAs operating Portfolio Management Services (PMS), renting out their registration certificates, and fund companies paying distributors commissions that are deemed to be “advertising expenses.”
She emphasised that there might be a “segmented approach” rather than a single rule for all situations and urged the “good guys” to assist the regulator in creating such standards.
RIAs are only permitted to make money from advising services, but the regulator has noticed that many of them operate platforms that allow investors to make direct investments in MFs. They cannot, however, receive compensation for recommending financial goods. The Sebi head asserted, “If you are managing someone’s money or portfolio, that is not advisory but a PMS.”
She said that fund firms would pay such advisors/distributors commission while deducting it as an advertising expenditure, and the regulator would discover that the amount matched the commission paid to the distributor upon scrutiny. The amount of transactions they enabled and the platform’s advertising income “match perfectly,” she added.
During a Q&A session, she stated that if the advising company was prepared to accept responsibility for their acts, the regulator might consider loosening rules to allow the hiring of new talent. This was in reaction to a claim that advisories cannot hire freshers because of the necessary educational background and work experience, which drives up the cost of talent.
On the other hand, investment advisory services revolve around providing investment advice. Investment advisors recommend specific securities or investment strategies but do not have discretionary authority over clients’ funds.
When the same entity provides both advisory and PMS, there is a potential for a conflict of interest. They might steer clients towards their own products or decisions that may earn them more commission or fees.
By segregating fees for advisory and PMS, clients can clearly understand for what service they are being charged. It brings about greater clarity in fee structures.
SEBI’s primary mandate is to protect the interests of investors in securities and ensure the development of the securities market. By implementing such measures, SEBI aims to shield investors from any unfair practices.
Advisors will now have to be more transparent about their offerings and clearly demarcate advisory services from PMS.
Since they can’t charge for PMS, advisors might have to reassess their revenue models. They’ll need to be compensated adequately for the advisory services alone.More rigorous documentation will be needed to prove that the fees charged are solely for advisory services and not masked as PMS fees.
Investors will now have a clear understanding of what they are being charged for. This makes the advisory fee structure more transparent. With the potential conflict of interest being reduced, investors can be more confident that the advice they receive is in their best interest.
Without the bundling of fees, there’s a chance that investors might end up paying less in total charges, depending on the advisor’s revised fee structure.
SEBI’s latest directive underpins the regulatory body’s commitment to safeguarding the interests of investors and ensuring transparency in the Indian securities market.
While it might necessitate some adjustments on the part of investment advisors, the move is a commendable step towards a more transparent and investor-friendly ecosystem.
As with all regulatory changes, the true impact of this directive will become more evident in the coming months, but it undoubtedly reinforces SEBI’s proactive approach to governance in the financial sector.
