Prohibitive cost of compliance

First,the potential community of members who can be brought under the IA Investment Advisor Regulations,excludes Amfi-registered distributors providing investment advice incidental to their primary activity,and persons providing advice exclusively in areas like insurance and pension products,provided they are regulated by sectoral regulators. This limits the number of individuals who will have to register themselves as IAs.

Second,the regulations require that the IA shall not obtain any remuneration from any person other than the client. This may be a serious setback for the budding community of advisors who have started charging an advisory fee. Almost all of them openly acknowledge that they supplement their fee income with commission from the product manufacturer to make it a remunerative proposition for them.

This is the most critical drawback of the proposed regulation. Moreover,it creates an asymmetry between banks and individuals/ institutions body corporate,partnership firms,etc who seek to be investment advisors. The former are being allowed to obtain a commission from the manufacturer but the latter are not. The alternative for non-bank entities is to get clubbed as a distributor and continue with business as usual.

Mis-selling by banks has been the bane of the financial services sector. Independent financial advisors,including financial planners,have brought about a refreshing change. They may be keen to come under the purview of these guidelines for enhancing their credibility but may be discouraged from doing so if the guidelines restrict their income without adding any value to their clients.

While Sebi also proposes that mutual funds have a separate expense ratio for a plan in which investors can invest directly,the differential benefit from investment in a direct versus a distributed product will be apparent only after some time. It will also depend on how the expense ratio is structured in the two plans.

The experience of portfolio managers governed under the Sebi PMS Regulations in recovering an advisory fee from clients has not been encouraging. Compared to a distributor who will be entitled to a trail commission,an investment advisor will be at a disadvantage. It is unheard of,that anybody pays a doctor an annual maintenance fee. How many clients will pay an investment advisor a similar annual fee linked to value of assets?

The risk of mis-selling is maximum among retail investors and it is important that they have access to genuine investment advice. If the cost of compliance is prohibitive,it will keep advisors away from this community and let them be served by distributors.

In a country not accustomed to paying for financial advice separately,a three-year transition to full advisory mode would have been pragmatic. A transparent disclosure by the advisor to the client about any other remuneration received by him should surely be insisted upon rather than being totally disallowed. To clean up the financial services sector,Sebi must encourage a larger breed of advisors who are willing to be regulated and want to make a difference with a regulatory endorsement. But this will be achieved only if it is also remunerative for them.

The Author is Founder,Citrus Advisors