Becoming an investment advisor is about to get a lot easier

India’s financial services landscape may see the entry of more professionals offering credible investment advice and researching on stocks, with the market regulator proposing to relax some of the severe restrictions which have stunted the sector so far.

Lower eligibility criteria, zero networth requirement and easier fee regulations are among a wide set of proposals that the market regulator hopes will attract more individuals to be registered investment advisors (RIA) and research analysts (RAs). The measures, proposed in a consultation paper released on Tuesday, aimed to encourage formal routes to financial information and check the rise of unregulated financial influencers on social media.

Changes in eligibility criteria

Currently, aspirants for RIAs and RAs must have at least a post-graduate degree; this may be lowered to graduation, the Securities and Exchange Board of India (Sebi) proposed. Besides, these professionals must now renew their National Institute of Securities Market (NISM) certification every three years; in future, they may have to secure additional certification only for the changes that have happened in the last three years.

The regulator also proposed to scrap the requirement of prior experience to be an RIA or an RA, since key executives of asset management companies who also handle retail money do not face any such requirement.

Significantly, Sebi proposed removing the networth requirement for RIAs and RAs as their services are fee-based and they do not manage clients’ funds and securities. However, they will be expected to maintain a deposit lien market to a stock exchange that recognizes them. The deposit amount will be based on the number of clients handled by RIAs and RAs— ₹1 lakh for up to 150 clients, ₹2 lakh for 150-300 clients, ₹5 lakh for 300-1,000 clients and ₹10 lakh for more than 1,000 clients.

Flexibility in fee charging modes

RIAs and RAs presently charge fees under two modes—assets under advice (AUA) mode (limit of 2.5% of AUA per annum per family of client) and fixed fee mode (limit of ₹1,25,000 per annum per family of client). If they wish to change the mode, the same can be effected only after 12 months since the last change of mode.

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Sebi proposed to do away with this method and give flexibility to RIAs and RAs to charge fees without a minimum period restriction.

Permissible activities 

Sebi has permitted individuals and partnership firms to seek registration for providing services as both RIAs and RAs, subject to compliance with rules and regulations. The paper proposed to demarcate the scope of investment advice of an RIA to a specific product belonging to an asset class falling within the regulatory purview of Sebi or other financial regulators.

Sebi also proposed that RIAs and RAs using artificial intelligence tools for servicing clients will be required to disclose the extent of use of these tools to their clients. Additionally, the responsibility of data security and compliance with regulations would lie solely with RIAs and RAs.

Definition of ‘research analyst’ and ‘research services’

Sebi said only those who provide research services “for consideration”, which means any form of economic benefit, will be considered research analysts. The research services by an RA shall be corroborated by a research report containing relevant data.

Sebi has also proposed to exempt proxy advisors (PA) from the ambit of the Research Analyst Administration and Supervisory Body (RAASB) as the nature of services of PA is different from RA. A PA will now be under the supervision of Sebi directly.

The maximum fees that an RA can charge is proposed to be brought at par with RIAs; that is, ₹1,25,000 per year per family in case of individual clients.

The limit on fees chargeable by RAs will not apply in the case of non-individual clients, including clients who are qualified institutional buyers (QIBs), accredited investors, and to institutional investors seeking recommendation of PA.

Expert view

Harsh Roongta, founder of FeeOnly Investment Advisors Llp, said on the face of it, the Sebi paper appears to be very positive. “This is going to be a big boost to the profession, and entry barriers have been dismantled. A clear segregation between the ‘one to one’ and ‘one to many’ services in the field, removal of net worth requirements on non-individual RIAs, allowing part-time RIAs, allowing dual registrations as RIA and RA are the centrepiece of the consultation paper,” he said.

Suresh Sadagopan, a registered IA, said lowering the eligibility criteria is welcome and allows more people to come in. “Doing away with net-worth requirement is also a welcome provision as this was a huge stumbling block for those who wanted to transition from Individual to corporate IAs,” he said.

He said the new category called part-time RAs may result in all kinds of people becoming part-time IAs like an architect, lawyer or doctor. The benefits of the same were unknown and may be confusing for investors, he added.

An RIA provides advice to clients for investments in securities or investment products based on risk profiling of clients. An RA provides security-specific buy/sell/hold recommendations or give price targets to its clients/subscribers not customized for needs of a specific investor or client.

The markets regulator had constituted 16 working groups to recommend simplification of various Sebi regulations and compliance requirements. The regulator has released a consultation paper and invited comments from public on proposed recommendations till 26 August.