Regulatory Overview of Investment Advisors In India

Introduction

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:

• Insurance agents or brokers registered with IRDAI;
• Pension advisors registered with PFRDA;
• Mutual fund distributors registered with AMFI who can provide basic advice to clients incidental to distribution activity;
• Any advocate, solicitor or law firm, who provides investment advice to their clients, incidental to their legal practice;
• Members of Institute of Company Secretaries of India (ICSI), Institute of Cost and Works Accountants of India (ICMAI), and Institute of Chartered Accountants of India (ICAI) who can provide advice to clients incidental to their services;
• Any stock broker or sub-broker, Portfolio manager, Merchant banker registered with the SEBI;
• Fund manager of Mutual fund scheme;
• Any person who provides investment advice exclusively to foreign clients.

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 27^th December, 2019;

> SEBI circular on Guidelines for Investment Advisor dated 23^rd September, 2020;

> SEBI circular on Publishing Investment Charter and disclosure of Investor Complaints by Investment Advisor on their website / mobile applications dated 13^th December, 2021;

> SEBI circular on Investment Advisory Services for Accredited Investors dated 21^st December, 2021;

> BASL Circulars.

Eligibility criteria for Registration as an Investment Advisor

Education qualification

> An individual investment adviser or a principal officer of a non-individual investment adviser shall have the following minimum qualification, at all times –

• A professional qualification or post-graduate degree or post graduate diploma (minimum two years in duration) in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the Central Government or any State Government or a recognized foreign university or institution or association or a professional qualification by completing a Post Graduate Program in the Securities Market (Investment Advisory) from NISM of a duration not less than one year or a professional qualification by obtaining a CFA Charter from the CFA Institute;
• An experience of at least 5 years in activities relating to advice in financial products or securities or fund or asset or portfolio management.

> Persons associated with investment advice shall meet the following minimum qualifications, at all times –

• a professional qualification as provided above; and
• an experience of at least 2 years in activities relating to advice in financial products or securities or fund or asset or portfolio management.

> 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:

• from NISM; or
• from any other organization or institution including Financial Planning Standards Board of India or any recognized stock exchange in India provided such certification is accredited by NISM.

Net worth

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:

• Annual income of at least INR 2 crore; or
• Net worth of at least INR 7.5 crore, out of which not less than INR 3.75 crore is in the form of financial assets; or
• Annual income of at least INR 1 crore and minimum net worth of INR 5 crore, out of which not less than INR 2.5 crore is in the form of financial assets.

> 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.

Compliance Audit

As per Regulation 19(3) of SEBI (Investment Advisor) Regulation, 2013 and SEBI circular dated 23^rd 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 31^st 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:

• KYC of clients;
• Risk profiling and risk assessment of client;
• Suitability assessment of advice being provided;
• Copies of agreement with the clients;
• Investment advice provided, whether written or oral;
• Rationale for arriving at investment advice, duly signed and dated;
• A register or record containing list of the clients, the date of advice, nature of the advice, the products/securities in which advice was rendered and fee, if any charged for such advice.
• Physical records written and signed by the client;
• Telephone recording;
• Email from clients;
• SMS from clients;
• Any other legally verifiable record.

Website Disclosures

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:

• Complete name of RIA as registered with the SEBI;
• Type of registration – Individual or Non-individual;
• Registration number, Validity of registration;
• Complete address with telephone number;
• Contact details of the Principle officer;
• Corresponding SEBI regional office address;
• Investment Charter;
• Investor Complaints received every month by 7^th of next month;
• Link of SEBI Scores platform.

Conclusion

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.