The landscape will change for investment advisers due to decisions taken by the Securities and Exchange Board of India
(Sebi) at its latest board meeting. The regulator has decreed that the same entity should not provide both advisory services and products such as mutual funds to a client (defined here as a family with dependent children, parents, etc). Sebi
has also put a cap of Rs 75,000 per account on the fees that may be charged from a single client for advisory services, with a maximum charge of 2.25 per cent of assets under management for smaller portfolios. However, separate subsidiaries owned by the same entity may sell and advise the same client. Sebi
has also said that it will raise the eligibility criteria in terms of both net worth and qualification for registration of advisers, while allowing existing registrations to continue to practice.
This move, aimed at preventing mis-selling, however, will favour companies that can create subsidiaries to use the same brand to sell and advise clients. Individual advisers, who commonly work through limited liability partnerships
(LLPs), will find it difficult to stay in the segment. They will either have to be pure advisers, or stick to simply selling products. Moreover, the cap on advisory charges will severely limit the upside in terms of income from such services. It also ignores the fact that advisory requirements of different clients may differ in their level of complexity. Indeed, the cap could make purely advisory services unviable commercially.
In practice, too, the segregation of advice from sales is impractical. While it is theoretically possible for seasoned investors to invest without advice, it is a difficult proposition, given the proliferation of schemes. Most clients will have to work with two separate entities, rather than a one-stop shop. This will likely make them gravitate to the same brand, favouring large companies, rather than seeking out two entirely separate entities. There may also be a situation where sellers offer “informal” advice off the books, while advisers create complicated corporate structures to try and get a slice of the sales commission. That sort of scenario would increase opacity and, possibly, even mis-selling — the very thing that Sebi
is attempting to curb. A more optimal solution would have been to address the concerns about mis-selling directly, rather than imposing a cap on advisory services and segregating sales and advice since those services fit together organically. Stringent penalties could have been imposed on mis-selling, promises of extravagant returns, and other common malpractices. Sebi could have looked to create a more transparent format for adviser interactions which clearly delineated the commission payable.
On the positive side, Sebi cleared the concept of regulatory sandboxes at the same meeting. This is a good step since it will allow financial service providers, including fintechs, to experiment with new products without having to worry too much about the fine print at the initial stages. It should spur innovation without creating larger market risks and, therefore, allow the regulator to make informed decisions about any such new products after reviewing their impact in practice within the sandbox.