Why do we need more awareness about SEBI-registered investment advisors?

But why did SEBI bring in regulations for investment advice? Money management is a great career path. A Wealth Manager or Investment Consultant helps you maintain or grow your wealth to achieve life goals. With professional advice, the complexities of the lifelong financial planning process can be better navigated. Hence it entails a high responsibility for taking decisions that directly affect the lives of the customers.

Unfortunately, the commission-based incentive structure in the established wealth management set-up has compromised the fiduciary responsibilities towards an investor. In simple words, in most of the cases the products offering high commission to the distributors/agents are not suitable for the investors. Net return on investment is after deducting the commission component. Products with higher commissions usually result in lower net returns in the hands of investors. The interest of an agent/distributor does not technically coincide with the interest of the investors. This results in mis-selling of unsuitable/less suitable products, affecting people’s finances and quality of life.

To address the problem of inappropriate recommendations, SEBI introduced the RIA Rules. RIAs may not receive any direct or indirect profit from product manufacturers. Their only source of revenue is the fees they collect directly from their customers. RIAs are also subject to higher qualifications, minimum relevant experience, repeated certification, accountability with regard to infrastructure requirements, suitability of advice, and adherence to other SEBI compliances. This results in higher transparency, credibility, accountability and better value addition.

Since RIAs do not earn from commission, they should recommend only zero-commission options wherever available, such as zero-commission direct plans of mutual funds (MFs). Recommendations are usually customized and combined with the commissions saved can increase net investment returns. RIAs continue to earn fee income as long as they continue to provide value to clients. As a result, the process aligns the interests of both the parties in a conflict free manner.

Despite the introduction of direct schemes of MF and RIA category way back in 2013, there is still a need for greater awareness about it. According to the March report by the Association of Mutual Funds in India, direct plan investment amounts to only 23% of individual wealth in mutual funds and the rest is still in regular plans.

We conducted a survey on LinkedIn and asked “Why don’t you invest in direct MF schemes?” To which 35% said they were not aware and 65% said they would not get advisory support.

The result is not too surprising as no media effort has ever been made to inform clients of the benefits of hiring an RIA. This is despite market regulator SEBI cautioning the general public against unregistered investment advisors. Well-financed established players prefer to run traditional commission-based businesses, which are easier to manage with less compliance. Hence, no large scale efforts are being made by them to promote fee based advisory services. The difficulty in running an RIA practice due to lack of awareness and high regulatory compliance costs is reflected in the low number of active RIAs even a decade after the category was introduced.

Fee-based consulting is very common in western countries. If the actions of Indian regulators over the past decade are any indication, fee-based advisory is finally going to be big and easily accessible to most investors. However, for this to happen at the earliest, there is a need to create awareness which will translate into demand for fee-based consultants. Higher demand will attract more quality people into the profession and accelerate the movement from commission-based delivery to fee-based advisory practices.

Now the question is who will create awareness about RIA? Is it based on roughly 1,300 RIAs, of which only 400-600 are active? SEBI needs to put in place some mechanism to remove large scale knowledge. In this way, the compliance burden on RIAs will become more bearable, and it will help flourish a profession that can improve the quality of life of people with access to unbiased and professional financial advisors.

Sumit Dusseja CO-Founder & CEO, TrueMind Investment Advisors Pvt. Limited