Investment Adviser vs. Research Analyst – Spotlight on Bigprofitbuzz
Introduction
Over the past few years, more and more people are opening demat accounts and investing, thanks to the rise in the number of finfluencers. Most of them invest without any prior knowledge of the market, just on the basis of some tips given by these so-called experts. The content disseminated by these influencers may prey on many people who enter the market with the intention of achieving rapid gains. Investors are in danger since these finfluencers operate in a regulatory grey area, unlike registered investment advisors and research analysts, who are required to disclose any conflicts of interest to the regulator.
However, according to SEBI Chairperson Madhuri Puri Buch, this issue will soon be resolved because SEBI is close to finalising a draft discussion paper to develop rules and guidelines to regulate the rapidly expanding number of unregistered financial influencers, or finfluencers, who provide investment advisors to the general public.
The problem that still persists is the thin line of distinction and the many similarities between an investment adviser and a research analyst. Although SEBI came out with two separate regulations regulating intermediaries in the finance industry: SEBI (Investment Advisers) Regulations, 2013 and SEBI (Research Analysts) Regulations, 2014. There are a plethora of cases in which the noticees have challenged and taken the defence that they are regulated by one or the other regulation. Also, one of the most basic and important reason to draw the distinction between an investment adviser and a research analyst is because they both require different qualifications and engage in dissimilar tasks. This article analyses the final order of SEBI in the recent matter of Mr. Jitendra, the proprietor of BigProfitbuzz, and explains how to clearly discern between an Investment adviser and a Research Analyst.
On the Point of Legal Interpretation
Regulation 2(1)(m) of the SEBI (Investment Advisers) Regulations, 2013 defines an investment adviser as follows:
“investment adviser means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called;”
The SEBI (Investment Advisers) Regulations, 2013 also define “investment advice” under Regulation 2(1)(l) as:
“ investment advice means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning.”
The term “financial planning” in the above definition, as per Regulation 2(1)(h) of the SEBI (Investment Advisers) Regulations, 2013, means:
“financial planning shall include analysis of clients’ current financial situation, identification of their financial goals, and developing and recommending financial strategies to realise such goals.”
A bare reading of Regulation 2(1)(m), 2(1)(l), and 2(1)(h) of the SEBI (Investment Advisers) Regulations, 2013 summarises an investment adviser as a person who provides investment advice relating to securities or other investment products to his clients based on their personal financial condition and goals.
As per Regulation 2(1)(u) of the SEBI (Research Analysts) Regulations, 2014:
“research analyst means a person who is primarily responsible for,-
- preparation or publication of the content of the research report; or
- providing research report; or
- making ‘buy/sell/hold’ recommendation; or
- giving price target; or
- offering an opinion concerning public offer,
with respect to securities that are listed or to be listed in a stock exchange, whether or not any such person has the job title of ‘research analyst’ and includes any other entities engaged in issuance of research report or research analysis.
This means that a research analyst basically makes a research report as a whole for all of his clients without checking the personal financial situation of any specific client. Moreover, the term “primarily responsible” indicates that the list cannot be interpreted exhaustively.
SEBI and Bigprofitbuzz
The Securities and Exchange Board of India (SEBI), through its final order dated July 18, 2023, has directed Mr. Jitendra, the proprietor of Bigprofitbuzz to refund all money received by him from investors within a period of three months in respect of his unregistered investment advisory activities.
He apparently failed in his attempt to divert SEBI’s attention from the more important issue of giving financial advice without a licence by focusing on a minor point. When his job was covered by guidelines for research analysts, he claimed he was being investigated for breaking those for investment advisors.
His main argument was how it is possible that his present activities come under Research Analyst regulation after 2016, but the same activities before 2016 come under Investment adviser regulation. Also, his website, through which he was offering service, has always remained the same for all practical purposes.
By analysing the final order of SEBI, four main arguments can be drawn that prove that Mr. Jitendra was operating as an investment adviser. The arguments are as follows:
- Jitendra’s website stated, “Bigprofitbuzz is an Indian stock market advisory firm”.
- As per paragraph 8 of the order, Bigprofitbuzz was offering various “packages” to provide personalised services for Equity, derivatives, commodities calls, etc.
- The website also mentioned bank details for making online payments for such services.
- According to Mr. Jitendra’s website and his own submissions, it is very apparent that he was engaged in providing intraday calls to his clients, which is equivalent to giving advice relating to investing in, purchasing, selling, etc.
Thus, SEBI held that activities carried out by Mr. Jitendra without holding the mandatory certificate of registration as an Investment Adviser are violative of Section 12(1) of the SEBI Act, 1992 read with Regulation 3(1) of the SEBI (Investment Advisers) Regulations, 2013.
Analysis
Simply put, when a person registers as an investment advisor, he agrees to give trading advice to clients on an individual basis after evaluating their risk-to-reward ratio, rather than disseminating their research report as a whole. Whereas, when a person signs up to be a research analyst, he agrees to give a research report to every customer in its entirety. Also, he gives his clients buy, sell, or hold recommendations without considering their risk-to-reward ratio.
Thus, personalised investment advice is subject to the SEBI Investment Advisers Regulations. It oversees financial advisors who create thorough, goal-based financial plans. As noted in Regulation 2(1)(h) of the SEBI (Investment Advisers) Regulations, 2013, financial planners and these advisers are required to evaluate the risk associated with each client in order to create a financial strategy that is unique to that customer. The recommendation is for the client’s advantage. As a result, each client’s investment recommendations may be different. The SEBI Research Analyst Regulation, on the other hand, applies to organisations or people that offer recommendations or advice based on research reports that investors can heed at their discretion. The advice is made based on the research of the research analyst, not with any specific client in mind. For example, if Mr. X provides the same buy/sell call based on his research report to all of his clients, he should register as a Research Analyst. But if Mr. X wants to give personalised advice to each of his clients that is best suited to that particular client, he should register as an Investment adviser.
In the present case of Bigprofitbuzz, as noted above in Regulation 2(1)(u) of the SEBI (Research Analyst) Regulations, 2014, it is necessary to provide a research report. For example, making buy/sell recommendations, giving price targets, or giving opinions must always be accompanied by a research report. But Mr. Jitendra was not able to show that his recommendations at any point were based on a research report. Thus, it became clear that he was giving investment advice and acting as an unregistered investment adviser before he acquired his registration as a RA.
Conclusion
The Bigprofitbuzz case provides a compelling example of the complex and thin line distinction between investment advisers and research analysts. It also explains how there can be a plethora of arguments by noticees to take defense of being governed by one or the other regulation. Briefly, Investment advisers provide specialised advice based on the unique financial circumstances and objectives of an individual client, ensuring a specialised approach. Contrarily, research analysts offer uncustomized research reports to all of their clients. But the true meaning of an investment adviser and a research analyst can be much more complex than it seems. As the landscape changes, there can be more eccentric arguments by noticees which will make it necessary for an in-depth analysis of the services provided by these individuals. Thus, SEBI’s efforts will probably be crucial in defining this line of demarcation in the world of financial influencers.
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