SEBI’s proposed changes could refresh investment advice regulations

There are only about 995 RIAs in the country, compared to about 150,000 mutual fund distributors and more than 2 million insurance agents. The new proposals could significantly increase the number of RIAs by easing requirements for master’s degrees and prior work experience and by lowering net worth requirements.

The proposed changes could also expand the talent pool for the advisory industry by making it easier to register as a person associated with an investment advisory service (PAIA). PAIAs help RIAs with their advisory work and can later become RIAs.

The proposals also raised the idea of ​​part-time RIAs, which could expand the net of regulated investment advice. This would not only encourage more people to consider RIA regulations—even if on a part-time basis—but would also introduce isolated pockets of advisory activity within the RIA regulation gambit.

For example, a chartered accountant helping a client with tax planning will typically suggest investing in tax-saving products such as the Equity Linked Savings Scheme (ELSS). However, the suggestion may also specify ELSS mutual funds suitable for the client. This is clearly an investment advisory activity. The consultation paper uses the phrase “registration required” to refer to anyone who engages in investment advisory activity – even if only partly.

Collateral damage

Another hotly debated topic in the proposals is rules that would make it harder for RIAs to provide advice on products that are not regulated by other financial sector regulators in the country. The proposed changes specify that RIAs cannot advise on products other than those listed above, and corporate RIAs would require separate divisions with separate branding to house products not regulated by the financial sector.

The regulatory intent here is clear. Since the RIA license is granted by the Securities and Exchange Board of India (Sebi), the RIA client can only seek redress for a complaint with Sebi regarding advice on Sebi-regulated products. However, a side effect of this step is the financial planning process.

Financial planning encompasses many dimensions, and the typical planning engagement will span multiple assets—physical and financial, domestic and international, proprietary and inherited, and so on. By placing barriers to what share of the pie investment advisors can capture, holistic financial planning will become a casualty.

When the RIA rules were introduced in 2013, they filled a very important need. Pooled investment products were regulated by the mutual fund rules or the alternative investment fund rules. Individual portfolio management was regulated by the portfolio management services rules. However, there was no regulation on overseeing financial planning and investment advice undertaken in a fiduciary capacity. The RIA rules filled that gap. By separating advice, the proposals could once again make financial planning an orphan.

For policymakers interested in promoting well-being through financial well-being, ensuring that households make the most of their interactions with the formal financial sector is an aspiration that should not be limited to simply “do no harm.” Comprehensive financial planning requires that such planning be multidimensional. A fully qualified advisor must be empowered to undertake this activity and cannot be limited to offering piecemeal, incomplete, or intermittent advice.

Given that financial planning can involve the jurisdictions of multiple regulators, perhaps the Financial Stability and Development Council (FSDC) has a role to play here – in enforcing the different contours of what constitutes “financial advice” and in developing a set of safeguards that should be provided to users of such advice. This would require close cooperation between different financial sector bodies, potentially under the auspices of the FSDC.

The proposed changes have the potential to accelerate the distribution of pure and fiduciary advice in India. A significant portion of Indian households are expected to create more wealth than at any other time in our history. If the financial system is to better manage this wealth, the time has come to create this opportunity.

Deepti George is the Deputy Executive Director and Head of Strategy at Dvara Research. Ravi Saraogi is a CFA, RIA and Co-Founder of Samasthiti Advisors.