Sebi is set to relax entry rules for financial planners. Can you rely on your financial adviser?

Sep 9, 2024

Synopsis
The new proposals, yet to be formalised, introduce several concessions to the earlier restrictive regime. It also opens up the space for individuals currently operating outside the regulatory purview. The intent is to encourage more individuals to step in and fill the void in the formal advisory space to provide guidance on money matters to millions. Find out if it could impact the quality of advice.

Are you searching for a competent financial adviser? You will be lucky to find one currently, as very few still operate amid an exacting regulatory environment. However, if things work out as planned, an army of newly anointed money managers will soon open shop. Big changes are afoot for this tiny community of around 950-odd registered investment advisers (RIA) and 2,700 certified financial planners (CFP). Worried by the dwindling numbers of foot soldiers catering to the financial well-being of the masses, markets regulator Sebi has introduced sweeping changes to its own investment advisory regulations.

The new proposals, yet to be formalised, introduce several concessions to the earlier restrictive regime. It also opens up the space for individuals currently operating outside the regulatory purview. The intent is to encourage more individuals to step in and fill the void in the formal advisory space to provide guidance on money matters to millions. So, will you now get to tap quality professional help for your personal finances? Or will the new regime sully the waters and dilute the quality of advice on offer?

Low entry barrier

The regulator is mulling several tweaks to the existing framework, which has taken a severe toll on the health of the formal advisory community. One set of proposals deals with lowering the eligibility criteria to operate as a financial adviser. The minimum threshold of qualification, certification and experience required by professionals have been considerably relaxed. For instance, a graduate degree will now be enough to start shop as an RIA, as opposed to the earlier requirement of a postgraduate degree or a professional qualification. Further, having relevant work experience in this field will no longer be a necessity. Currently, five years of work experience is a must for an RIA or any principal officer. Even persons associated with the RIA, such as relationship managers or ‘para-planners’, will not need any work experience. Two years’ work experience is a must under the current regime.

These are substantial concessions aime at allowing new advisers to join the profession easily. It opens the floor to thousands of aspiring professionals, removing the earlier barriers. With on-the-job training, these juniors can quickly be moulded from relationship managers or para-planners to financial advisers. However, there are potential downsides to these neutered eligibility norms. Critics argue that these could make the arena far too easy for anyone to enter. It may unintentionally end up diluting the quality of advice on offer.

Managing the money of another person is a fiduciary responsibility. It also requires the professional to have a thorough understanding of how the markets behave across entire cycles. Renu Maheshwari, CEO and Principal Adviser, Finscholarz Wealth Managers, observes, “Holistic advice requires knowledge about the market and how to interpret complex numbers correctly. It is also highly personal in nature, guided by an individual’s unique circumstances.” A graduate fresh out of college is not likely to have the depth of experience required to make an informed judgement or take necessary action in the client’s portfolio. Vivek Rege, Founder, V R Wealth Advisors, insists that a simple exam cannot be a substitute for the right experience or skillset. “Knowing theory about how to fly a plane does not mean I can actually fly one. I must get firsthand experience about flying under different weather conditions before I can obtain a flying licence,” says Rege.

This loose gating policy is further accentuated by the proposal to allow part-time RIAs into the fold. Any practising chartered accountants, insurance agents and mutual fund distributors can now cross over into the advisory fold. Even individuals engaged in other professions, such as doctors, lawyers or teachers, will be permitted an RIA licence on a part-time basis. This also sets the stage for an army of finfluencers—currently doling out advice to millions without regulatory supervision—to formally step into the shoes of an adviser.

Dwindling number of licensed advisers is a concern

Many RIAs have given up practice over the years amid crippling compliance burden.

Opening the advisory arena to part-time players is aimed at beefing up the profession’s strength, as well as curbing the menace of unregulated advice. Some feel this will protect the masses from harmful, illinformed advice. Harsh Roongta, Founder, Fee Only Financial Planners, says, “Today, many non-qualified people are giving financial advice, some of which is causing harm. Finfluencers’ ability to influence Gen Z is very strong. If they can be brought with the ambit of regulation, it will have a calming effect on the industry.”

Anyone can become a financial adviser now

Proposed norms will lower the entry barriers for financial advisers.

However, many experts are not convinced. Sadique Neelgund, Founder & Director of Network FP, argues, “Advisory is a full-time business that requires round-the-clock commitment towards a demanding set of clients. Having part-time advisers will do no good for the industry or participants.” It also opens up the profession to individuals who are not adequately equipped to provide well-rounded financial advice. The quality of financial advice on offer might ultimately suffer. Rege asserts, “The advisory profession will open up to all manner of non-market participants. Only a few individuals will have the calibre to offer quality advice. Most will lack the necessary skillset.” Maheshwari adds, “A few bank of officials or other intermediaries with relevant experience could prove to be valuable advisers, but handing the advisory reins to others without the necessary experience or qualification may compromise the quality.”

To be sure, the proposals provide for some added restrictions on part-time RIAs. They will not be allowed to have more than 75 clients. Additionally, such advisers will have to clear necessary exams to earn the RIA licence, even if it is a part-time activity.

Further, setting up an RIA practice will be easier on the wallet. Sebi has proposed to do away with the minimum net worth requirement of Rs.5 lakh for an individual RIA and Rs.50 lakh for corporate RIAs. Instead, Sebi has suggested that RIAs must deposit a sum of money with a stock exchange to cover any liability in case of disputes arising at a later stage. This sum will range from Rs.1 lakh to Rs.10 lakh, based on the number of clients served. Industry watchers say that the removal of net worth requirement will allow individuals to smoothly transition into a corporate set-up when the number of clients exceeds the threshold. This, too, has been relaxed. Now, Sebi has proposed that individual RIAs must register as corporate RIAs only if the number of clients exceeds 300 (presently 150), or if the fee collected in that financial year exceeds Rs.3 crore.

Restricted scope of advice

Even as Sebi has loosened the guard rails at one end, it has put fresh curbs elsewhere. One proposal calls for disallowing investment advisers from offering services or products not regulated by Sebi or any other Indian financial regulator. Corporate RIAs may offer these products or services only through a distinct entity, operating under a different brand. Individual RIAs will not be accorded this leeway altogether.

Essentially, the regulator has now barred investment advisers from offering comprehensive financial planning services—covering activities as diverse as tax planning, estate planning, loan reconciliation—under the existing licence. Going forward, a financial adviser may not be in a position to help you write a will for passing on your assets or consolidate and pay off your loans. The adviser will only be permitted to offer advice on broad allocation for different asset classes under different regulators. Sebi cites the inability to address complaints related to products or services not directly under its supervision, or falling under the jurisdiction of another regulator, for this stricture.

Limited scope of advice by financial planners

With the proposed tweaks, executing a comprehensive financial plan will not be possible.

Other relaxations for RIAs

Eligibility to apply for corporate RIA licence after reaching 300 clients or Rs.3 crore fees collected during the year, instead of the existing limit of 150 clients.

Registration as part-time investment adviser or research analyst allowed.

Flexibility to change the fee mode (fixed-fee mode to AUA mode, and vice versa) for a client at any time during the year.

Registrations allowed as both investment adviser and research analyst.

However, this binding provision could backfire, fear experts. Many individuals seek out a financial adviser for guidance in all aspects of their financial lives. This requires that the adviser take a holistic, multilayered view of the person’s finances, covering areas as diverse as domestic and foreign equities, fixed income, gold, loans, property, art, cryptocurrency, and more. Providing guidance in a few areas of a client’s portfolio, while ignoring others, limits the efficacy of that advice. It may even render the whole exercise futile.

Complaints against pure-play financial advisers form a small percentage

Trading call providers constitute a bulk of the complaints against RIAs.

Clearly, the entire jigsaw puzzle of a household’s finances cannot take shape with a few pieces missing. “If an adviser cannot be holistic in his approach, he can never be a fiduciary, that is, he cannot work in the interest of the client if he does so on a piecemeal basis,” insists Maheshwari. “Clients will be at sea if they cannot get comprehensive advice at one place. A multi-disciplinary approach is vital to the success of a financial plan,” avers Roongta. Besides, this restriction on licensed advisers is jarring when others can offer all kinds of financial products and services with impunity. Rege laments, “It is perplexing that somebody who is less regulated can engage in more activities, but not someone who is compliant and regulated. It makes the playing field highly uneven.”

The Association of Registered Investment Advisors (ARIA) has vehemently opposed this proposal. “This provision clubbed with the lower entry barriers can render compliant RIAs to mere MF and securities peddlers with hardly any meaningful advice. This also makes the regulation ‘productcentric’ and there will be no ‘clientcentric’ licencee left in the country,” it mentions. This, it feels, will create an ‘unsafe space’ for the investor looking for holistic advice, because that will move to the ‘unregulated space’. The industry body has, instead, mooted that advisers issue a disclaimer pertaining to services offered beyond the purview of Sebi, specifically clarifying that no complaint can be raised in that regard.

Besides, critics point out that there is no strong evidence suggesting that clients are being repeatedly harmed by such financial advice. Indeed, analysis of complaints and enforcement orders recorded against RIAs indicate that trading call providers account for a bulk of the complaints. These are entities that issue ‘buy’ and ‘sell’ calls on securities, particularly in the futures and options (F&O) segment. These have come under the scanner in recent months as a haven for ‘pumpand-dump scams’ that have ensnared thousands of victims.

Incidentally, Sebi has also clarified if trading call providers will be governed as investment advisers or research analysts. If the trading call is provided after the risk profiling of the client and product suitability assessment, such trading calls are on a ‘oneto-one’ basis and, hence, proposed to be under IA regulations. If a trading call is issued on a ‘one-to-many’ basis and, therefore, without any risk profiling or product suitability assessment, such activity shall be under RA regulations. Financial advisers are against this proposal, insisting that trading call providers should not be allowed an advisory licence. “A security-based recommendation, by definition, cannot be one-to-one. As it cannot be oneto-one, it cannot constitute ‘investment advice’. Effectively it becomes an RA activity,” objects ARIA.

Critical decision

More financial advisers are the need of the hour, but in its bid to shore up the numbers, Sebi has, perhaps, relaxed its guard rails too far. Rege remarks, “Increasing the number of financial advisers cannot be the only end goal. The quality of advice should also matter. The community should only attract people with the right calibre.” Maheshwari warns, “If entry barriers are kept too low, it may harm the sanctity of the profession itself. Too many lives could be damaged until the regulator feels compelled to step in again and take corrective action.” Besides, limiting the scope of a financial adviser’s work will prevent individuals from availing of a comprehensive financial plan. Neelgund rues, “Sebi has wrongly mixed the broad nature of financial planning activity within the narrow confines of investment advisory. It will sabotage the noble profession and is really unfair to the end investors, who will never find a holistic financial adviser.”

Working with a financial adviser armed with the right credentials is critical for the financial journey for those seeking advice. Make sure you choose your adviser wisely after undertaking appropriate reference checks. Be wary of unscrupulous individuals misusing the licence to push specific products. Refrain from crossing over into the unregulated advisory space if your licensed adviser is constrained from advising on specific products or services outside his remit. Hopefully, the final guidelines that will be announced soon will let advisers offer a comprehensive financial plan. That’s important for your family’s well-being.

[The Economic Times]