Sebi fee cap: Move could force players to change biz model, say advisors

Topics Market news | Sebi | Sebi norms

Market observers say that capping of fees at Rs 75,000 can force some to switch to the AUA model.
The Securities and Exchange Board of India’s (Sebi’s) move to cap fees for advisory services could force players to move out of the advisory business and switch to commission-linked services, with advisors seeing the move as detrimental to business viability.

In its board meeting on Monday, the markets regulator laid down norms for advisors. It barred them from offering distribution services and stated there will be an upper limit on the fee advisors can charge from their clients.

Industry participants say this could make life difficult for advisors offering services to high net-worth investors, where operating costs are on the higher side.

“If there is a big client, the amount of work involved is likely to be huge. Typically, it entails 30-45 days of intense work with that client. The fee involved for such a client can easily surpass Rs 75,000 per annum,” said Suresh Sadagopan, founder of Ladder7 Financial Advisories.

“Running a business can become unviable. Several costs are involved pertaining to office, staff, salaries, etc. An advisor may be forced to consider exiting or switching to commission-linked models,” added Sadagopan.

“On the one hand, Sebi has greatly enhanced the eligibility criteria for an advisor in terms of high qualification and experience. At the same time, it expects professionals to enter the industry where fees are going to be curbed,” said another advisor.

While a detailed circular on the matter has not yet been issued, Sebi in its consultation paper had said the maximum fee an advisor can charge from a client can be Rs 75,000 per annum. And if the client comes through the assets under administration (AUA) model, the advisor can charge 2.5 per cent of AUA. Further, the advisor cannot use a hybrid model, but choose between the two.

Advisors say this can pose another set of challenges. Some clients would like to continue after the initial two-month engagement, and would prefer the AUA model — it is more cost-efficient.

Market observers say that capping of fees at Rs 75,000 can force some to switch to the AUA model. 

Advisors are of the view that the regulator would need to offer more clarification as to how this model can work. 

“While we need to wait for the fine print, the consultation paper says clients can be charged in AUA mode. What about instances where there are no assets involved? There can be cases where the client wants to consult for coming out of a debt trap, making his/her Will or the family budget,” said Gaurav Mashruwala, certified financial planner.

He says there is uncertainty around these aspects and whether clients would need to be charged separately for such engagements and not in AUA mode. Mashruwala currently offers advisory services through the fixed fee model.

Another proposal in Sebi’s consultation paper that advisors are worried about is the requirement to corporatise once the client limit reaches 150 or advised assets exceed the Rs 40-crore mark.

“While the provision didn’t find any mention in the board meeting minutes released by Sebi, such a move could create high entry barriers and deter new players,” said Melvin Joseph, founder of Finvin Financial Planners.  

The consultation paper says that within six months of reaching either of the above two marks, the individual advisor would need to mandatorily have a net-worth of Rs 50 lakh and re-register as a corporate advisor.

In its consultation paper, Sebi also proposed that an advisor can only charge half the fee in advance, which advisors say can make the process of recovering any outstanding dues from clients an onerous task.

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