Piece of advice, peace of mind

A look at how the market regulator is working to free the investment advisory space from conflict of interest and mis-selling, as it tries to win over investors.

By: ENS Economic Bureau | Published: February 10, 2014 4:55:12 am

UK Sinha, chairman of the Securities and Exchange Board of India (Sebi) last week got a two-year extention as Sebi chief. Sinha has been working on many issues, and one of them is to build retail investors’ trust in the market and provide the desired handholding in terms of financial advisory being offered to them. 

The regulator himself has been raking up the issue of building trust among investors and has made efforts to rid the investment advisory space free of conflicts of interest and mis-selling so that the consumers’ interests are protected and they get the best advice based on their risk profile. While a lot has been done on this front, there is still a lot more ground to be covered.

While the investment advisor regulation became a reality in 2013 where the regulator differentiated between an adviser and a distributor — demarcated their roles within the regulations — it is still in the process of evolution and has to take off.

The issues around financial advisory and distribution surfaced in line with the growth in markets. As the financial markets rose sharply in the five-year period between 2003 and 2007, sales of financial products such as mutual funds, insurance products etc gained momentum and with them came rising instances of mis-selling and other bad practices. While such practices became an issue of discussion at several forums it also drew the regulator’s attention.

Steps taken by regulators in the past

Questions were raised on the role of agents and distributors as to whose interest were they serving since they were earning revenues both from the product manufacturer (in the form of commissions) and from the investors (in the form of advisory fee or other charges) too. Also there were questions on whether they were offering the best product to the consumer or their decision to pitch a product was based on commission being offered by the product manufacturers.

Sebi took a decision in 2009 to ban entry load on mutual funds thereby bringing in an advisory fee regime where the investor would decide on the fee to be paid to the distributor based on the service offered.

Later the capital markets regulator thought of clearly defining the roles of distributor and advisor.

In the meantime, the Insurance Regulatory and Development Authority (Irda) also took steps to rationalise the commission structure in the first year of the product sale in a bid to curb mis-selling and bring in better practices in the market.

In 2013, Sebi brought in the Investment Advisor Regulations where it laid down guidelines on who qualifies as an advisor and also drew broad contours of the rules and regulations within which they need to operate.

Sebi also invited applications for setting up Self Regulatory Organisation (SRO) for mutual fund distributors. While three organisations — Association of Mutual Funds of India, Financial Planning Standards Board, India (FPSB) and Financial Intermediaries Association of India (FIAI) have applied for forming an SRO, Sebi is yet to take a decision on appointing one of them.

Once an SRO is in place, it will bring in minimum professional standards for MF distributors, lay down rules and regulations for them along with enforcing them and also having a dispute resolution forum for investors. This will go a long way in regulating the distribution space in the mutual fund industry.

“The decision to ban entry load through was disruptive was a good decision in the long run. Sebi’s decision to define mis-selling as a fraudulent practice was also a major decision in this area as it becomes more serious and the move will curb such practices,” said V Ramesh, deputy CEO, AMFI.

The way forward

While the regulator has brought in investment advisor regulations, very few financial planners have moved forward to get themselves register as investment advisors and are rather willing to work as distributors.

Experts say that the regulator needs to bring in more clarity so that people can look forward to become an advisor.

“There is lack of clarity in the regulations and there is a lot of confusion which is stopping a lot of individuals from getting registered as advisors,” said Ramesh. While Sebi has brought in some changes to bring CFP’s directly into the investment advisory fold there are many who feel that Sebi needs to do a lot more in order to make it a success.

Sebi’s Investment advisory regulations state that no one can carry out advisory business unless registered with Sebi and also puts in a condition that adviser’s shall maintain an “arms length” relationship with all activities other than advisory. A number of investment advisors see it as a major road block as they are concerned about their distribution income that they have built over several years and which they will have to forego if they start working as an adviser.

While some are getting their family and extended family members to become a distributor so that they can transfer their distribution business the company, there are others who are making their business partners to set up a distribution firm where they can transfer that business.

“I want to work as an adviser but I can’t let go my distribution income that I have built over the last 8-10 years,” said a financial planner based in Mumbai.

Also Sebi’s regulation allows MF distributors, chartered accountants, insurance agents, pension adviser, advocate etc to provide investment advice to their clients incidental to their primary activity and does not provide a specific business model to advisers that distributors can’t do.

Therefore, till the time these bottlenecks remain and more clarity comes out, Sebi may find it tough to attract the financial planners into the advisory fold and thereby usher in a new regime of fee based advisory module that is expected to be more transparent and investor friendly.

Sebi makes way for direct entry of financial planners as advisors

The Securities and Exchange Board of India (Sebi) in January decided to relax norms that qualify individuals to register themselves as investment advisors. 

Having received only around 70 registrations in the first 12 months, Sebi, through a notification issued on January 27, exempted certified financial planners (CFPs) from taking the mandatory NISM certification to be eligible to register as an investment adviser.

It, however, gave a one-month window to CFP aspirants to get the certification and become eligible and directly register as an adviser, even though on an average it takes almost 12 months for individuals to clear the exams, thereby raising question on the rationale of the decision.

Sebi’s investment advisory regulations state that only NISM certified individuals can register themselves to work as an investment advisor but with dismal registration numbers, Sebi has been left wanting for more.

“If such an associated person has obtained certification by passing “Certified Financial Planner” certification from FPSB India as on date of this notification or obtains the CFP certification from FPSB India within 30 days from the date of this notification, he shall not be required to obtain certification by passing the IACE-1 or IACE-2,” said the Sebi notification issued on January 27.

The move not only makes almost 2,500 CFP certified individuals automatically eligible to register themselves as financial advisors but also gives one month to almost 30,000 individuals who have registered themselves for the certification and other aspirants to clear all the modules of the program and attain the certification.

If all CFP’s register themselves as advisers, Sebi will see a sharp rise in the number of financial advisers.

But questions being raised on the rationale of Sebi’s decision to give only one month to CFP aspirants to clear their exams as the average time taken by an individual to obtain the certification is around 12 months.

“On an average a student takes around 12 months to study and clear all the modules and get the CFP certification. I can’t understand the rationale behind giving a one month time to clear all the exams,” said a source who did not wish to be named.

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