Last Updated on November 2, 2021 at 8:44 am
This article discusses why SEBI needs to categorize investment advisors like mutual funds as there is considerable confusion among investors.
It has been almost nine years since the SEBI investment advisor regulations came into force. In essence, the rules mean that a person or entity has to be registered with SEBI to provide investment advice and financial planning.
However, even today, a good chunk of the financial services industry operates in total disregard of the regulations. Mutual fund advisors continue to provide investment advice (they should not). Certified financial planners continue to provide investment advice without registration (they should not) and so on.
Even within the small universe of registered investment advisors, there is considerable confusion. Since the name says “registered investment advisor” (RIA), many investors feel that the primary job is providing such advice with active management of stocks or mutual funds to provide a higher return.
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What is the problem? Financial planners are registered with SEBI as investment advisors; mutual fund investment portals are registered as RIAs. Entities that offer qualitative or quantitative stock baskets are registered as RIAs. Stock tip providers are also registered as RIAs. Robo advisory firms are also registered as RIAs.
The mode of compensation also varies widely. Some charge a flat fee. Some charge a percentage of assets under advisement. Some offer free services and choose to monetize user analytics in a personally non-identifiable manner.
Clients don’t know what to expect from each registered entity. Many members of the Facebook group, Asan Ideas for Wealth, claim that fees for a fee-only SEBI RIA are “too much” for the investment advice they provide.
This is because they are under the wrong impression that all a fee-only financial planner does is provide investment advice. Many investors are ignorant that a financial planner also provides health/life insurance advisory, estate planning, budgeting and cash flow advisory, debt management, goal-based advisory etc.
This is why SEBI needs to categorize RIAs. For example, those who offer holistic financial planning services can be called “SEBI registered financial planners”.
Similarly, we could have
- SEBI registered robo advisors
- SEBI registered stock advisors (long-term)
- SEBI registered stock advisors (short-term – a better sounding phrase for tipsters) etc.
If a financial planner also provides stock advisory, they can be referred to as SEBI registered financial planners and stock advisors (hopefully long term!).
Yes, this is a lot more fancy-sounding titles, but the advantage is, an investor will know what to expect from the registered entity beforehand. They will have the right expectations. They will not expect goal-based advice from a stock advisor or vice versa.
This will help investors develop a better appreciation for these registered entities and provide a better client-advisor fit. We have SEBI employees following our articles. Let us hope someone chooses to act on this.
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