Where are India’s missing investment advisors?

Take for example the case of this Mumbai based RIA. After working for nearly 30 years in various roles in the financial services and advisory industry, he was in for a shock when new regulations mandated him to obtain a master’s degree. He got his RIA license in 2019, but the very next year SEBI made it mandatory for all RIAs under the age of 50 to acquire a postgraduate degree or diploma or a CFA charter within three years.

He was 47 at the time and says the need to comply seems bizarre. “How will postgraduation enable me to give better advice when I have done this for 30 years without a master’s degree. Think of a graduate advisor with 15 years of work experience, a fresh graduate with only three years of work experience doing advising. The latter may not have seen a single market cycle,” said the advisor who did not wish to be named.

He enrolled for postgraduate studies but practical challenges did not allow him to complete the course. “It was very difficult to manage my business, family and other obligations along with my studies,” he said. This, along with some other compliance mandates, prompted them to surrender their license in 2021.

In another case, a Mumbai-based corporate RIA, who did not wish to be identified, submitted its application for withdrawal of license in April after nearly six years of active practice. “Every month, a new regulation comes out and that forces you to completely change your business processes. It has come to a point where you are just racing to figure out what the next compliance headache is. Yes,” said the advisor.

These are not standalone cases. More and more RIAs are giving up their licenses after the SEBI regulations. In 2020, SEBI introduced flat fee model, tightened qualification standards for RIAs and client-facing staff who were hired by corporate RIAs, mandated a corporate license for more than 150 clients, net -Worth requirements increased and the scope of the annual audit broadened.

compliance burden

Most RIAs say that the new rules involve cumbersome procedures and hence increase the burden of compliance (see graphic), The co-founder of a tech-based corporate RIA said his firm had written to Sebi, seeking surrender of its RIA license. “Most of my time is spent worrying whether I have missed the compliance requirement. Earlier, SI Portal (SEBI Intermediary) made the job easier as SEBI would assign tasks to you and you would have to complete them. Now, we have moved to a regressive practice of emailing BASL (BSE Administration and Supervision Limited), a supervisory body, which never acknowledges receipt of audits,” he pointed out. Peppermint, He also did not want to reveal his identity.

Among the various compliances that RIAs have to meet, they have to record and store every communication, whether it is done over a phone call, WhatsApp, email or in-person meeting with an existing or potential client. These can only be stored with a storage provider that complies with India’s data protection law, so the RIA must obtain a certificate confirming this from the service provider and submit it to the auditor.

Another major pain point is the long agreements that customers have to sign. It is a complex process from the point of view of ease of doing business. Even a small change in the risk profile of the investor would require re-signing of the agreement.

But SEBI’s rationale for these stringent regulations is to curb malpractices by stock tippers, who are acting as RIAs. “Look at these regulations from an investor’s point of view. It sets high standards for admission of RIAs, gives them a good reputation and will ensure that only the best advice reaches investors,” said SEBI-registered RIA, Tawaga said co-founder and CEO Nitin Mathur.

That said, the trend of RIAs surrendering their licenses is a matter of concern as their number is already quite low at 1,325 as on May 15. Out of them only 886 have registered with BASL. Moreover, according to industry players, the number of those practicing under the active financial planning model with clients is only 200-250, while others are either running smallcases or are not active.

other constraints

RIAs provide unbiased investment advice to their clients, but unlike distributors and brokers, cannot sell financial products, and therefore, can only earn through clients or may be charged a fixed fee. 1.25 lakh per annum or up to 2.5% of the value of the property under advice (AUA). Plus, RIAs cannot execute investments on behalf of their clients, which combined with the flat fee structure ensures that the advice is completely conflict-free.

But, the increase in the number of compliances has increased the cost of doing business, says a Pune-based investment advisor, who declined to be named. This former RIA used to trade a small portion of clients’ portfolios in derivatives on a profit-sharing basis, but SEBI banned such profit-sharing models for RIAs. They say that the fixed fee model was inadequate as compliance costs escalated. “I had around 100 clients but with a smaller ticket portfolio. I didn’t earn much from a flat fee and on top of that I had to spend a lot of money 30,000 for audit, apart from the cost on disclosures, KYC checks, changing the website landing page as per SEBI norms and maintaining customer communication. These small costs add up over time,” he said, adding that he eventually decided to stop the practice and return the license in September 2022.

Other developments, too, had an impact on RIA’s revenue. Recently, SEBI ordered them to conduct cyber security training for their clients and employees. Such training is usually conducted by a company secretary and may cost 40,000-60,000.

The high cost of business has deterred many qualified individuals from entering the space. Shubham Gupta, Co-Founder and CEO, Growthvine Capital and a CFA charterholder, is a case in point. Gupta had considered applying for an RIA license before becoming a mutual fund distributor. “I’m an advocate of conflict-free advice, but it didn’t make economic sense for us to build an RIA business,” he said. Charging customers fees during difficult market conditions is a practical problem. They don’t pay renewal fees. , saying that the portfolio is down, and demanding to know what they are charging for. In India ‘advice’ is considered free, so it is difficult to build an entire business around it.”

The co-founder cited above of the tech-based corporate RIA firm said that both revenue models — a flat fee and a percentage-based fee on AUA — have their limitations. “The flat fee charged to customers is never too high 30,000-50,000 per customer as most people will not pay more than that. One can argue that the AUA percentage share model can earn you better as the portfolio grows but in reality many investors only invest a small portion of their portfolio through RIAs. Then they rebalance the same portfolio on their own to avoid inflating the AUA,” he added.

SEBI’s latest advertisement code for RIAs could be the last straw that will break the camel’s back. As per the order, RIAs have to take prior approval from BASL and pay 3,000 fee in case of individual RIA, and 6,000 if it pertains to corporates, every time a new advertisement has to be given. Advertisements, by order, do not refer to marketing materials only, but all forms of communication ranging from circulars to newsletters in any communication mode with any reference to past performance that may influence an investment decision.

Responding to this development, all former RIAs Peppermint spoke unanimously that he does not regret his decision to revoke his license.

“It has reached a point where SEBI is not regulating RIAs but micro-managing every aspect of their business. Such regulations will prompt more RIAs to leave,” said the Pune-based investment advisor.

Financial influencers, or financiers, are a growing concern, as are distributors and lenders who thrive on a lack of regulation.

“The bigger issue facing RIAs is the existence of this alternative model of distribution that continues to give advice (beyond casual advice) and earn through commissions from the products they sell. This is the biggest reason why RIAs Why are the numbers not increasing. Why would a distributor take an RIA license and go through all the compliances,” asks Ashish Ketan, founder, Serenity Wealth, a SEBI-registered RIA.

This is the reason why wealth managers are choosing alternative career paths. And Portfolio Management Services (PMS) is one of the options.

“Wealth companies are increasingly moving towards setting up an ND-PMS (non-discretionary PMS) structure instead of RIA business. Through ND-PMS, the manager recommends funds similar to RIAs, but under the PMS model. Another difference is that the PMS manager is bound to execute transactions under the client’s demat account, whereas in the RIA model, investors are free to execute transactions themselves.”

Many former RIAs have now taken up various roles in investment advisory, such as creating investment-related content, collaborating with PMSs as a fund manager, corporate trainer and life coach, while some have gone back into distribution.