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It thus came as a surprise to registered investment advisers (RIA) when the Securities and Exchange Board of India recently proposed cutting off such offerings under its investment adviser (IA) licence.
Under Sebi’s proposal if an investment adviser still wants to provide such services, they would need to do so through a separate legal entity and with a different brand time. Needless to say, the RIA lot is not happy with the proposal. At least three RIAs toldMintthat if these proposals are approved, it would mean the death of financial planning in India.
In a recent consultation paper, the market regulator proposed that investment advisers shall not provide services/products such as tax planning, estate planning, loan management, real estate, gold, and bitcoin under the IA licence. The reason: such products are not regulated, at least not by Sebi, and thus might not be scrutinised enough. Sebi thinks it will be difficult for it to resolve client complaints related to such offerings.
Also read | How Sebi’s reforms could transform India’s investment advisory landscape
For products regulated by a financial regulator other than Sebi, investment advisers can continue to provide such services given that any grievances shall be dealt by the other regulators and not Sebi.
Grievances related to fixed deposits by the Reserve Bank of India, to the National Pension Scheme by the Pension Fund Regulatory and Development Authority, and insurance schemes by the Insurance Regulatory and Development Authority. In a way, Sebi wants to steer clear of anything unregulated or regulated by some other authority.
To be sure, registered investment advisers can still give broad asset allocation advice such as to invest 20% of a person’s savings in gold or 15% in real estate. But if they want to actively advise on such assets or handle tax planning, Sebi doesn’t want them to under the IA licence.
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Strong disagreement to Sebi’s proposal
When the IA regulations were formulated in 2013, Sebi included the word ‘financial planning’ as a subset of investment advice. Due to this, many people opted for the IA licence with the sole purpose of providing 360-degree financial planning. Now, Sebi wants to remove the term ‘financial planning’ and advisers to just focus on managing a client’s regulated assets.
“We provide what our clients want and they expect us to provide a 360-degree financial plan,” said Renu Maheshwari, a registered investment adviser and vice chair of the Association of Registered Investment Advisers (ARIA).
If an investment adviser does not look at the whole picture and instead focuses on which products to buy, that amounts to merely selling a product, she said. “Investment advisory is a part of financial planning and Sebi is looking the other way around.”
A financial plan would take into account a client’s income, debt, whether they own a house, tax liability, etc., to assess what kind of investment suits them. “If I don’t advise on insurance products or risk management while doing investment advisory for my client, then I will miss out on what other risks the person is taking,” Maheshwari said. “The regulator is looking at jurisdiction-centric while we are looking at client-centric.”
The textbook definition of financial planning includes multiple aspects of one’s financial life, ranging from a child’s education plan, insurance, taxes and estate planning. Investment advisers also offer suggestions on international stocks and employee stock options in global companies. But Sebi’s consultation paper now proposes keeping such assets outside the boundaries of investment advisers since these are either not regulated or regulated by a foreign regulator.
Suresh Sadagopan, an investment adviser, said it would become too cumbersome to create a financial plan for an individual by using different entities. “It would become a hassle and not possible to create multiple entities to cater to the needs of a single client.”
Harsh Roongta, an RIA and founder of Fee-Only Investment Advisors, said Sebi’s concern of complaints arising from financial planning activities involving products that are unregulated and regulated by other entities is disproportionate.
Also read | How Sebi is cracking down on unregistered investment advisers
Data compiled by the Association of Registered Investment Advisors shows that about 73% of the complaints Sebi has received since 2013, when RIA regulations were introduced, related to trading call providers and just 1% to advisory services. (see infographic)
“I personally believe F&O (futures and options) advisory should not be allowed under the RIA licence because that’s where most of the complaints are coming from,” said Roongta.
There is no separate data point for the number of complaints arising from products or services that are unregulated or not regulated by Sebi.
A possible middle ground
Several registered investment advisers suggest a clear disclosure to clients stating that there will be no recourse to Sebi for products that are unregulated, instead of having to create separate entities for advising on different products or services.
Roongta said that in developed markets like the US, despite a complicated regulatory environment, there was no such stringent requirement for financial planners.
He also pointed out that Sebi is fine with part-time advisers providing unregulated services but with a disclaimer that such activities do not fall under the purview of Sebi regulations.
Sebi has proposed the concept of part-time advisers in the same consultation paper for professionals with non-finance backgrounds; such advisers can take up to 75 clients on a part-time basis.
Roongta suggested the same treatment be allowed for full-time RIAs providing financial planning.
“A client comes to one person to get comprehensive financial advice. If it’s broken up into two separate pieces, the offering would get fractured,” said Roongta. “Doing it under two entities might mean the end of financial planning.”
Another possible solution would be for Sebi to whitelist some products and services such as tax planning, wills, and estate planning, and blacklist more risky products under the purview of financial planning.
For now, RIAs remain hopeful that the proposal will not be finalised. Sebi has taken feedback from RIAs and will go back to the drawing board to carve its final regulations.