With rising retail fascination for market products post Covid, the number of demat accounts has shot up from four crore to over 15 crore and mutual fund folios from nine crore to 19 crore. However, many new investors make decisions without formal guidance, or get taken in by unregulated entities. Therefore, it is about time Securities Exchange Board of India (SEBI) looked at expanding the ranks of registered investment advisers (RIAs) and research analysts (RAs).
RIA and RA numbers have stagnated at 1,300 each for many years now, due to the high compliance burden. SEBI’s recent consultation paper seeks to ease the regulatory environment for registered advisers. While its proposals to reduce entry barriers to the profession are welcome, micro-managing how advisers must conduct their business or charge fees may prove counter-productive. The most significant change is the removal of net worth requirements for individuals seeking to pursue advisory careers. Today regulations require individual IAs and RAs to demonstrate a net worth of ₹5 lakh and ₹1 lakh, respectively, to apply for registration, while those taking the partnership/corporate route need ₹50 lakh and ₹25 lakh, respectively. This rule unnecessarily makes wealth a pre-condition for a knowledge-based profession. Therefore, SEBI’s idea of doing away with the net worth requirement, replacing this with a lien on a nominal deposit is welcome.
However, there is a proposal to dilute the qualification criteria for registered advisers from a post-graduate degree in business/finance to a graduate degree and do away with the need for five years’ experience. This seems ill-advised, given that investment advisers must be able to navigate complex financial markets and products. Allowing an entity to hold both RA and IA registrations may be a good move, given the blurred lines between the two. Most investors would prefer the full gamut of services from a single entity. But SEBI could be opening up a Pandora’s Box in allowing individuals with regular jobs and other professions, to double up as part-time IAs/RAs. This may result in entry of unqualified individuals. The high incidence of mis-selling in insurance is a cautionary tale.
The paper treads on contentious territory by prescribing rules for commercial practices. Presently, regulations require RIAs to charge either a percentage fee capped at 2.5 per cent of assets or a flat fee limited to ₹1.25 lakh a year. Instead of removing the cap, SEBI proposes to extend it to RAs too. It wants to prohibit RAs from levying fees for more than one month at a time in advance. Such controls are not necessary in a profession where the client and the adviser can mutually agree on an appropriate fee. Investors are reluctant to fork out a fee for financial advice, anyway; they prefer to rely on unreliable free advice. Imposing curbs on fees will compromise the commercial viability of this profession.