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38 Beyond Market 10th Oct ’11 Advising The Advisors The concept note on the regulation of investment advisors proposes certain positive practices for advisors and distributors, thus aiding investors in choosing the right products for their investment portfolios R etail investors, who sometimes used to get unwarranted financial advice resulting in huge losses on their investments, is set to change as markets regulator, Securities and Exchange Board of India (SEBI) is planning to regulate financial advisors and distributors selling financial products. The concept paper on the regulation of investment advisors released by the SEBI recently proposed some positive practices for the advisors and distributors, which might help investors chose right products for their portfolios. The regulator has invited public comments on the draft guidelines before 31st October. The markets regulator plans to regulate investment advisors through a Self-Regulatory Organization (SRO) which will look into issues relating to financial products mis-selling, violation of code of conduct, conflict of interest, etc. The SRO set up for the regulation of investment advisors shall follow the rules laid down by the respective regulators for products falling under their purview. Individuals in the advisory business would have to register themselves with the SRO and have to comply with its rules and regulations. Besides individuals, even portfolio managers It’s simplified...
who only provide investment advice would have to register with the SRO. It is always seen that selecting between an agent and an advisor may be problematic for investors since no proper guidelines regarding their qualification or eligibility are in place yet. However, several investors have begun running a proper background check on the distributor or advisor before seeking any financial advice. The SEBI, in its concept paper, has proposed a minimum qualification without which an individual cannot work as a financial advisor. It has proposed that an individual needs to be either a chartered accountant, an MBA in finance or needs to hold a similar qualification or should have at least 10 years of relevant experience in the field. The regulatory order also states that in addition, individuals would be required to have a certification from SEBI-approved organizations such as the National Institute of Securities Markets (NISM). In case of advisory services from banks, at least two key personnel from the bank would be required to have relevant experience and suggested certification. The person who interfaces with the customer should declare upfront whether he is a financial advisor or an agent of the product manufacturer. If he is an advisor, he would be subject to the Investment Advisors Regulations and would require a much higher level of qualification. He would act as an advisor to the investor on all financial products. He would receive all payments from the investor and there would be no limits on these payments. On the other hand, there will be agents who will be associated with the manufacturer and would receive remuneration from them. However, they will be prevented from styling themselves as financial advisors and will have to call themselves as agents only. The SEBI’s decision to regulate the advisors is being done mainly to protect the conflict of interest among financial distributors. Investment advisors or their representatives would be required to do adequate risk profiling of the client before any investment service is provided to them. Based upon the risk profiling performed by the investment advisor or their representative, suitable investment advice should be provided to the client. The records of such risk profiling and investment advice should be maintained by the investment advisor. Currently with no proper availability of records, investors are, therefore, not in a position to produce proof of any false practices. The concept paper is intended to clear the confusion among investors about wealth managers, private bankers, and portfolio managers. It also states that advisors should be strictly identified as ‘investment advisors’ and not by names like wealth managers or private bankers. Besides, they should be highly qualified. “This causes much confusion as to their role and responsibility. Hence the (proposed) regulations will provide that no person can carry on the activity of offering investment advice unless he is registered as an investment advisor under the regulations,” said SEBI. According to the paper, currently distributors play a dual role as agents of both the investor and the financial product manufacturer, getting paid from both ends. Such divided loyalty is not in the best interest of stakeholders and results in a situation where the distributor is loyal only to himself, churning investors' portfolios and squeezing more commission from the manufacturer. Investment advisors cannot receive any money from anyone other than clients and must clearly indicate fees and charges payable along with detailed information about their businesses, history and terms and conditions for advisory. They cannot outsource any activity except research reports and shall not be liable for civil and criminal liability for their advice unless negligence or mala-fide intention is established. Also advocates and chartered accountants who provide advice in their respective professions are out of the domain. It also leaves out newspapers and the broadcast media. Additionally, stock brokers and sub-brokers, who provide investment advice without charging any fees and any person offering only insurance broking under the regulations of the Insurance Regulatory and Development Authority (IRDA), will not be covered under the proposed investment advisor regulation. The concept paper has proposed that all investment advisors will act only in the best interest of their clients (fiduciary responsibility). In case they provide other services such as broking, dematerialization of shares, etc, they should maintain a Chinese wall between advisory and other services and must disclose them to the client, said SEBI. However, a final decision will be taken only after looking into the public comments. But the path chosen by the regulator will lead to advisors selling right products to the investors and not feed them with unwanted products which might hurt their pockets and prevent them from achieving their financial goalS. Beyond Market 10th Oct ’11 It’s simplified... 39
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