Investment Advisor is a person or an organization who gives an ‘investment advice’ to another person in exchange of monetary value. Investment Advisor plays multiple roles, including financial planner, financial advisor, investment advisor, portfolio manager, and also tax savings advisor. Investment Advisor, in order to carry on advisory activities, must be registered with the Securities and Exchange Board of India (‘SEBI’) as per SEBI (Investment Advisors) Regulations, 2013 (‘SEBI Regulation’). SEBI Regulation provides that no person shall act as an investment adviser or hold itself out as an investment adviser unless he has obtained a certificate of registration from the SEBI. No person, while dealing in distribution of securities, shall use the nomenclature ‘Independent Financial Adviser’ or ‘IFA’ or ‘Wealth Adviser’ or any other similar name unless registered with the SEBI as Registered Investment Adviser (‘RIA’). Hence, registration is compulsory for carrying out investment advisory activities.
Who needs to register as an Investment Advisor?
Any person or firm or group of persons, engaged or willing to engage in a business that provides ‘investment advice’ to anyone for consideration is required to register as an investment advisor. “Investment advice” is an 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. Provided that the investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of SEBI regulations. However, investment advisers who make public appearance or make recommendations or offer an opinion concerning securities or public offers through public media while making recommendations through public media, are required to comply with the relevant provisions of SEBI (Research Analysts) Regulations, 2014.
However, the following category of persons are exempted from SEBI RIA registration:
Regulatory Framework dealing with RIA
There are following 2 bodies dealing with the RIAs:
1. Securities and Exchange Board of India (‘SEBI’) which is regulatory body for RIAs; and
2. BSE Administration and Supervision Limited (‘BASL’) which is supervisory body entrusted with the supervision of working of RIAs.
SEBI prescribes the registration terms, qualification, eligibility criteria, fees to charge from the client, agreement with the client, and implementation services. SEBI has been amending the rules for RIAs from time to time to enhance investor confidence and increase transparency in investment advisory services. On the other side, BASL supervise the working of RIAs in India.
Following are the regulatory framework for RIAs in India:
> SEBI (Investment Advisors) Regulation, 2013;
> SEBI circular on Measures to strengthen the conduct of Investment Advisors dated 27th December, 2019;
> SEBI circular on Guidelines for Investment Advisor dated 23rd September, 2020;
> SEBI circular on Publishing Investment Charter and disclosure of Investor Complaints by Investment Advisor on their website / mobile applications dated 13th December, 2021;
> SEBI circular on Investment Advisory Services for Accredited Investors dated 21st December, 2021;
> BASL Circulars.
Eligibility criteria for Registration as an Investment Advisor
> An individual investment adviser or a principal officer of a non-individual investment adviser shall have the following minimum qualification, at all times –
> Persons associated with investment advice shall meet the following minimum qualifications, at all times –
> An individual investment adviser or principal officer of a non-individual investment adviser and persons associated with investment advice shall have, at all times a certification on financial planning or fund or asset or portfolio management or investment advisory services:
|Individual Investment Advisor||INR 5 lakhs|
|Partnership firm, Companies, Body corporate and LLPs||INR 50 lakhs|
Agreements between clients and RIA
RIAs needs to execute an agreement regarding the investment advisory services with its each and every client to maintain transparency. SEBI does not specify the format of the agreement; however, the terms, guidelines and conditions are specified in the SEBI circular dated September 23, 2020 which needs to be incorporated in the Investment advisory agreement.
Fees to be charged from clients
SEBI has prescribed the following maximum fees for RIAs:
> A fee of 2.5% of Assets under Advice (AUA) per annum per family or
> A fee of INR 1,25,000 per annum per family.
RIAs can choose any one mode of the above while charging the client. The change in mode shall be effected only after 12 months of on boarding client/last change. RIAs shall have to receive fees through banking mode only.
However, the above mentioned cap on fees are not applicable on accredited investors and the limits and modes of fees payable in case of accredited investors shall be governed through bilaterally negotiated contractual terms and conditions.
“Accredited investor” means any person who is granted a certificate of accreditation by an accreditation agency who,
> In case of an Individual, HUF, family trust or sole proprietorship:
> In case of a body corporate, has net worth of at least Rs.50 crore;
> In case of a trust other than family trust, has net worth of at least Rs.50 Crore;
> In case of a partnership firm set up under the Indian Partnership Act, 1932, each partner independently meets the eligibility criteria for accreditation:
Provided that the Central Government and the State Governments, developmental agencies set up under the aegis of the Central Government or the State Governments, funds set up by the Central Government or the State Governments, qualified institutional buyers as defined under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, Category I foreign portfolio investors, sovereign wealth funds and multilateral agencies and any other entity as may be specified by the SEBI from time to time, shall deemed to be an accredited investor and may not be required to obtain a certificate of accreditation.
General Responsibility of RIA
> An RIA shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise.
> An RIA shall not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided.
> An RIA shall maintain an arms-length relationship between its activities as an investment adviser and other activities.
> An RIA which is also engaged in activities other than investment advisory services shall ensure that its investment advisory services are clearly segregated from all its other activities, in the manner as prescribed hereunder.
> An RIA shall follow Know Your Client procedure as specified by the SEBI from time to time.
> An RIA shall not act on its own account, knowingly to sell securities or investment products to or purchase securities or investment product from a client.
> In case of change in control of the RIA, prior approval from the SEBI shall be taken.
Appointment of Compliance Officer
An investment adviser which is a body corporate or a partnership firm shall appoint a compliance officer who shall be responsible for monitoring the compliance by the investment adviser in respect of the requirements of the Act, regulations, notifications, guidelines, instructions issued by the SEBI.
As per Regulation 19(3) of SEBI (Investment Advisor) Regulation, 2013 and SEBI circular dated 23rd September, 2020 titled “Guidelines for Investment Advisers”, Investment Advisers shall ensure that Annual Compliance Audit in respect of compliance of SEBI regulation and circulars issued thereunder shall be conducted.
The Audit shall be completed within 6 months from the end of each financial year i.e. by 30th September. Such a Compliance audit needs to undertaken by the Practicing Company Secretary (PCS) or CA and needs to be submitted to the ‘BASL’. RIAs must along with audit report, report the adverse findings, if any, along with action taken thereof to BASL within a period of one month from the date of the compliance audit report but not later than October 31st of each year.
RIAs who are also providing distribution services, should get the certificate from an auditor confirming compliance with the client level segregation requirements. This certificate will form part of the compliance audit.
Format of Annual Compliance Audit
BASL has specified the format of Audit report vide its circular dated May 19, 2022. Hence, Auditor needs to give his/her report in the format specified by BASL.
Maintenance of Records
Investment advisor shall maintain the following documents and records, either physical or electronic form for a period of 5 years:
RIAs shall display the following information prominently in their website, mobile app, printed or electronic materials, KYC forms, client agreements, and other correspondents with the clients:
There are several benefits of getting a SEBI RIA license. On the other side, the investors also get the quality services because RIAs have the qualification, certification and experience required by the SEBI regulations. Moreover, RIAs also do a risk profiling and check the suitability of the investment advice as per SEBI guidelines and this will help the investors to achieve their investment goals. The RIAs are obliged to act in a fiduciary capacity towards their clients. Therefore, they disclose all the conflicts of interest as when they arise. Furthermore, the execution and investment advisory services are separated to reduce conflict of interest. Thus, this brings in transparency during the process of investment advice. Considering all these facts and benefits, it is advisable to get registered with the SEBI for providing investment advisory services and investors should also seek advice from a SEBI registered RIAs only.