Why investment adviser rules need a relook
Market regulator Sebi had created a new category of Investment Advisers (IA) vide its IA Regulations, 2013. IAs were to act as a fiduciary to the client and earn from fees paid by them. There were many stipulations on education, experience, certification, compliance, disclosures, etc., which the IAs have had to comply with. Ten years on, the IA community has shrunk to just 926 members (as per the numbers registered with BSEASL as of early July), down from over 1,300. This does not augur well for the industry when the intention was to make available high quality, client-centric advice to investors at large. Thus, a relook at the 2013 regulation is necessary.
The IA regulation states that the investment adviser is a person who is in the business of providing advice for a consideration. This could mean that those who offer advice and not charge a fee are not investment advisers and need not come under this regulation. This is problematic. The intent is to protect investors’ interest and give them access to high quality advice. Yet, anyone can give advice without charging a fee. They can then get compensated through other means such as commissions or brokerages on sale of products like insurance, mutual fund schemes, fixed deposits, non-convertible debentures, etc. This was the situation that existed even before the IA regulation came in!
Any advice has good and bad consequences and hence the person giving advice should be held accountable even if they don’t charge a fee. If such a person does not come under the IA regulation, they can mislead investors and get away with it.
As per IA Regulation, investment advice is defined as advice relating to securities for clients, which includes financial planning. Note that financial
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