The pure objective of SEBI’s Investment Advisor (IA) regulations is to ensure that clients get the best investment advice without any conflict of interest. Here is a summary of the regulations, which were first implemented in 2013 and were revised over the years:
IA must be registered before giving any advice to investors; IAS can only earn advisory fees from clients. They cannot charge any commission, brokerage, referral fee, convenience fee etc. If a client signs up as an advisory client, the advisory entity and the entire corporate group of which IA is part may not earn any commission, brokerage or sales charges from the client or the client’s family/group; Any intermediary who does not have an IA certification can provide investment advice in any form.
Many product distributors, whether they are money managers, brokers, etc., have been wary of becoming an IA because they cannot earn product or placement commissions that can be anywhere between 1-5% depending on the type of products sold to them Receive. But with the increasing demand for ‘advisory’ services, some clever mechanics have come into play to meet the demand of investors. Here’s something:
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Portfolio Management Services (PMS) Advisory: Using this route does not expressly prohibit the owner group of the intermediary to earn product commissions by selling third party products to clients. Also, while the PMS manager can choose to invest in the direct option of mutual funds, he or she will not have access to the lower fee options in PMS and AIFs (alternative investment funds) that are available only to Registered Investment Advisors (RIAs). Needless to say, this route is not heavily regulated.
Advancing in-house products: This is the most common practice in which IA uses group-made products to collect management fees, operating fees, and so on and carry or earn profit shares that total 1-4% could. In all these cases, even a ‘low’ advisory fee may be charged.
The F route: While the F platform was launched to offer higher risk or alternative funds, the platform has recently seen all kinds of structuring that includes using pure debt or long-only equity strategies that are in F. does not correspond to ‘a’, that is, optional. But still, we have seen a range of listed equity and mixed asset allocation products. This platform can be used to:
One, advisors use a ‘Model Portfolio’ F scheme to allocate a substantial portion of the client’s money – so while they could have asset and product allocation at the advisory account level, the same structure is done inside F. Obviously now can charge a management fee of 1-2%, operating fee and maybe even a carry. This directly goes against the whole premise of the IA Regulations. Furthermore, there is no regulation around the fact that one can earn commission and brokerage while selecting products. Second, the advisor creates a new F for each Ultra High-Net-Worth Individual (UHNWI) – this option bypasses the IA guidelines and creates a competitive structure with very light rules, mostly reporting. This does not expressly prevent the intermediary from earning any commission or brokerage by linking those products to F. It can get even worse when the intermediary adds some in-house products inside the F model portfolio!
If investors really need genuine advice, they need to ask questions and not shy away from brand, business size and other sales tools. One, they need to be sure that they are signing up to an investment advisory platform. Second, they need to be aware and sensitive to any in-house products that are pushed to them. Third, UHNWI and family offices should ensure that there is no conflict of interest in the institution that could lead them to give mostly biased advice.
Munish Randev is the founder and CEO of Cervin Family Office & Advisors.