The Securities and Exchange Board of India (Sebi) has come out with detailed guidelines for registered investment advisors (RIAs). The regulations were first proposed in January and finalized in July 2020. The latest set of guidelines fills in the gaps in areas such as fees, which were previously sidestepped.
Under these guidelines, RIAs will not be permitted to offer distribution and advice to the same client. Fees will be capped at 2.5% or ₹1.25 lakh, depending on whether a percentage or a flat fee is levied. Individual RIAs with more than 150 clients will have to corporatize or stop accepting additional clients. All RIAs will have to sign investment advisory agreements with clients by 1 April 2021, incorporating terms laid down by Sebi.
The Sebi guidelines said that existing clients can opt for either the advisory or the distribution services of the RIA at the group or family level. However, the rules state that clients should not be forced to redeem existing assets under advisory or distribution due to this choice.
“Sebi has also allowed grandfathering of existing assets of clients, so nobody will have to redeem based on which service they choose,” said Lovaii Navlakhi, founder, International Money Matters Pvt. Ltd. New clients will also have to choose between distribution and advice.
‘Client’ as per the Sebi guidelines includes the dependent family of the client. Sebi has stated that ‘dependent’ means members whose assets on which the advisory is sought to be provided originate from a single income. This implicitly carves out an exception for non-dependent family members such as independently employed spouses.
“The definition of family as dependent on a single source of income can help advisors distinguish between independent family members but it could push some individual RIAs closer to the upper limit of 150 clients,” said Navlakhi.
This is because separate counting of independent spouses adds to the client count overall. Individual RIAs with more than 150 clients will also have to register as corporate RIAs, as per the new Sebi rules. If they are not granted corporate registration, they can continue to service up to 150 clients as individuals.
Sebi has allowed RIAs to charge fees under the fixed fee model or percentage of assets under advice (AuA) model.
In case of fixed fee, Sebi has set a cap of ₹1.25, lakh higher than the ₹75,000 it had proposed in January. In the case of percentage of AuA, the cap has been set at 2.5%.
“The fee structure doesn’t allow for much flexibility. For example, specific fees for project work on particular client finances, but at 2.5%, the cap is liberal,” said Navlakhi.
RIAs must also comply with the qualification thresholds proposed by Sebi such as post-graduate qualifications in certain subjects and five years of experience (two years for persons associated with investment advice).
However, the regulator has carved out a curious exception for existing RIAs over the age of 50. However, the latter will have to hold NISM accredited certifications. Sebi has also laid down certain procedural guidelines with respect to audit and record-keeping.
“RIAs will now have to maintain an audit trail of conversations even with prospective clients. This doesn’t necessarily mean recording all phone calls, but rather some form of record, like signed minutes of the meeting or email from registered email id will have to be kept. The Sebi guidelines also bring in clarity on the applicable deadline for compliance ranging from 1 January 2021 to 1 April 2021. There was some ambiguity about this previously,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.
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