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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