Under new RIA norms, all your financial needs won't be under one roof

The new regulations, which aim to curb conflict of interest arising out of clients being pushed to buy products by the advisor who would also gain a commission on the products, come into effect from October 1
Come October 1, your financial advisor will not be able to provide you investment advice. Tightening the regulations for registered investment advisors (RIAs), the Securities Exchange Board of India (Sebi) on July 3 has notified changes to the Sebi (Investment Advisers) Regulations, 2013, to bring in segregation of investment and distribution services.

It specifies that corporate (non-individual) advisors will be allowed to offer both advisory and distribution services by floating two separate legal entities with clear demarcation. No client will be offered both services.

An individual RIA can either be an advisor or distributor, never both. However, the RIA can offer transaction services without any fee in direct plans. Also, Sebi has barred family members or separate legal entities controlled by family members of RIAs from offering distribution services — a practice quite commonplace. A typical client used to pay an investment advisory fee to the RIA. The RIA would execute the plan through a family member.

The new regulations, which aim to curb conflict of interest arising out of clients being pushed to buy products by the advisor, who would also gain a commission on the products, come into effect from October 1.
Earlier, many RIAs would charge a small fee for advice, but have the clients purchase products of their affiliates or sister concerns, thereby earning a commission in the distribution arm.

“The new norms will bring about some fundamental shifts in the way RIAs do business. There will be a rethink on business models, and fresh conversation will have to be had with clients on their needs. Most clients seek holistic services. Earlier this was possible with proper disclosure. Now clients will have to pay two levels of fees (one for advisory, the other for making product purchases),” said Vishal Dhawan, founder and chief executive officer (CEO), PlanAhead Wealth Advisors and an RIA.


He also pointed out that the window provided by Sebi to help a client purchase ‘direct’ plans has its own limitations. “For this to work well, we need direct variants to be available across financial products. At present, only mutual funds offer direct variants and some portfolio management services providers will be allowed to offer later,” said Dhawan.

Advisors also feel that the three month-period allowed for segregation to kick in is too short and that the new norms should have ideally been allowed to kick in from the new financial year. “It would have been better had the regulator chosen to implement the new regulations from April 1, 2021,” said Anil Rego, founder and CEO, Right Horizons.
Transitioning is not simple. “For example, if I got business in the first part of the current financial year, there will be issues for the client if regulations are implemented in the middle of the year. Existing clients should be allowed to remain in the current structure, with a provision allowing credits of brokerage from distribution to clients,” said Rego.

Dhawan agrees. “We should be given more time. When a transition happens, for example, from a regular plan to a direct plan, it involves sale and purchase of securities. This has a tax angle attached to it. Also, we are in the midst of a pandemic and it may be difficult for many to smoothly transition to the new regime,” he said.

Dhawan also felt the fee structure under the new regulations should be notified by Sebi. Also, he said that Sebi is giving a push to corporatisation of the financial advisory business by stipulating in the regulation that individual RIAs with over 150 clients must form a corporate entity.

Sebi has also raised the bar for RIAs by increasing the net-worth requirement for individuals to Rs 5 lakh, from Rs 1 lakh, and from Rs 25 lakh to Rs 50 lakh for corporate entities. However, it has allowed existing players a three-year window to comply. “Higher net-worth requirements would ensure only serious people are in business,” said Rego.

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