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Capital markets regulator the Securities and Exchange Board of India (Sebi) has recently released its final investment advisor regulations. The thrust of the guidelines is to differentiate an advisor from a mere distributor and regulate investment advisors and hold them accountable for the advice given to their clients. As per the guidelines, an advisor is expected to give advice to the client after considering his risk profile, investment objectives including the time frame he wishes to stay invested, his risk taking ability and preference for investment products.

"All advisors need to be registered with Sebi and there should be an arm's length distance between the advisory business and the distribution business," says Vishal Dhawan, founder, Plan Ahead Wealth Advisors. Investment advisers providing distribution or execution services to their clients need to keep their investment advisory services segregated from such activities.

What Will Change?

Currently, most investors seek the help of a financial planner or an IFA (independent financial advisor) or even banks to make investments. Most of these advisors make money primarily through commission from the manufacturer — that is, a company or a mutual fund. This is exactly why there have been numerous complaints from investors that they have been sold wrong products.

The new regulations intend to separate the role of an advisor and a distributor. Even if you avail advisory services from your advisor, you shall not be under any obligation to avail distribution or execution services offered by the advisor.

There shall be an arm's length distance between its activities as an investment advisor and its distribution services. This means, an advisor will have to disclose any consideration by way of remuneration or compensation or in any other form whatsoever, received or receivable by it or any of its associates or subsidiaries for any distribution or execution services to the client.

Not only this, an advisor shall disclose his holding or position in financial products which are subject matter of advice. He shall not reverse this position till 15 days of giving this advice.
The new regulations make an advisor more accountable. An advisor will have to maintain records relating to rationale of advice, copies of agreement with clients, suitability assessment of investment advice and store these records in either physical or electronic form for a period of five years.

Since the advice given will be recorded for as long as five years, investors will have access to the track record of the advisor. This will help them differentiate one over another. It will add value to an investor's portfolio over the long term.

All New Advisor

The new advisor will be different in terms of qualifications as well as record keeping. The individual who wishes to get registered as an investment advisor should have a professional qualification or post-graduate degree/diploma in finance, accountancy, business management, commerce, economics, capital markets, banking, insurance or actuarial science or should be a graduate with five years of relevant experience. Besides this, corporate entities need a minimum net worth of . 25 lakh while individual advisors need a net worth of . 1 lakh.

The Challenges In Implementation

While the regulations are good for investors, there could be challenges in implementing them. For example, take the case of mutual funds. The direct investment plan has been introduced for all schemes from January 1. As per financial planners, if investors use the direct plan to invest in equity mutual funds, they could save 40-60 basis points in expense ratio every year. So it is but natural that advisors would want investors to invest via the direct plan. However, as of now this is not feasible.

For direct application in mutual funds, we do not get transaction feeds from the registrar/ mutual funds. This transaction data is crucial and without it, you cannot track investments.

Hence financial planners would not be able to recommend direct plans to investors. As there is no cost savings for the investor, because he continues to invest in the normal plans, he would hesitate in paying an advisory fee to the advisor. Moreover, maintaining more records, keeping separate divisions would mean more compliance cost, and paper work.
Due to this barrier, many distributors may continue to operate in their current role and may not want to make a transition to an advisor.

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