In India, not everyone can offer investment advice. They will first have to be registered as an investment adviser (RIA) with SEBI. Once registered they have the obligation to act as a fiduciary. Meaning they will have to put the client first at all time. Or in other words, prescribe only commission free products. Whether you are only an investor or are looking to become an investment advisor, the following guest post is a compelling read.
In this post, Melvin Joseph one of the first RIAs in India (he was a fiduciary even before it was legally required to be one) discusses the requirements and qualifications to become a registered investment advisor in India. Melvin is one of the very few advisors who we can be sure earns money only from us and not via commissions. Over to Melvin.
How to become a Registered Investment Adviser (RIA) in India?
Till 2013, there was no clarity on who can be an Investment Adviser in India. In the absence of any regulations anybody could claim himself as an adviser.
Why SEBI Regulation is necessary for Investment Advisers?
Most financial products in India are loaded with the agent’s commission and the products are too complex for the investor to understand. Agents used to advice clients which were not really in the interest of the investors. Since the agents represent few companies, they can sell products of only those companies. Market Regulator, Securities and Exchange Board of India (SEBI) felt the need of segregating distribution and advice. SEBI come out with Investment Advisers Regulations (2013) which is a welcome step in the interest of the investors. As per this no person shall act as an Investment Adviser unless he has obtained a certificate of registration from SEBI. This will help an investor to avail the services of an RIA and make investments without the fear of any conflict of interest. The RIA is compensated only through the fee paid by the investor. This will ensure that the RIA will protect the interest on the investors by recommending the best suited financial products as per the need of the investor.
Who can be an Investment Adviser in India?
An individual, partnership firm, body corporate or a company can apply for registration as Investment Adviser.
Qualification to apply for registration as an Investment adviser in India
If you want to apply for registration as an Investment Adviser in India, you should have the following minimum qualifications:
(1) A professional qualification or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science or
You should be a graduate in any discipline with an experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management.
(2) A certification on financial planning or fund or asset or portfolio management or investment advisory services from (a) NISM or (b) from any other organization or institution including Financial Planning Standards Board India (FPSB) or any recognized stock exchange in India provided that such certification is accredited by NISM.
In simple words, a post graduate in finance related topics or a graduate in any discipline with 5 years experience in financial sector can pass the following 2 examinations by National Institute of Securities Markets (NISM) and apply to SEBI for registration as an Investment Adviser.
- NISM – Series-X-A: Investment Adviser (Level-1) Certification Examination
- NISM- Series – X-B: Investment Adviser (Level-2) Certification Examination
In lieu of the above 2 examinations, you can pass Certified Financial Planner (CFP) examination of the Financial Planning Standards Board India (FPSB).
You should also have net tangible assets of not less than rupees one lakh if you are an individual or partnership firm. For others, the net worth should not be less than 25 Lakhs rupees.
Fees to be paid
If you are applying as Individual or Partnership Firm, the application fee is Rs. 5000/-. Otherwise, it is 25,000. Once your application is approved, you have to pay the registration fee of 10,000 if you are applying as Individual or partnership firm. For others, the registration fee is 5 Lakhs.
Process of application for registration as an Investment adviser (RIA)
You can get the details from SEBI website. Please see the relevant link giving the details.
You have to apply to SEBI in Form A (attached below)
Documents to be submitted to SEBI along with application
You have to submit the following documents (self attested) along with application in Form A.
- Proof of Identity
- Proof of address
- Proof of qualification
- Experience Certificate in case of graduates
- CIBIL Score
- Net worth certificate from a Chartered Accountant
- Income Tax Returns for the last 3 years
- Application fee of 5000/25,000 as applicable
- Various declarations as the case may be.
You have to send these documents to the Regional/Local office of SEBI in your area. You also have to send a soft copy to SEBI.
SEBI will scrutinise your application and if there is any discrepancy, they will point out so that you can rectify them. Once your application is approved, you will get an intimation to pay the registration fee. You can make the fee payment (10,000 or 5 Lakhs) at this stage. On receipt of the fee, you will get registration as Investment Adviser.
The registration is valid for 5 years and the same process is to be followed for renewal. The fee structure also will be the same for renewal. The application for renewal must be given to SEBI 3 months before the expiry of registration.
An investment adviser which is a body corporate or a partnership firm is required to appoint a compliance officer who shall be responsible for monitoring the compliance by the investment adviser. In the case of an individual RIA, he himself is responsible for such compliance. Yearly audit by a Chartered Accountant is required to ensure compliance.
An investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise. He shall act honestly, fairly and in the best interests of the clients.
SEBI has launched a new web-based grievance redressal system called SEBI Complaint Redress System (SCORES). Investors can lodge their complaints at http://scores.gov.in. On receipt of complaints, SEBI takes up the matter with the concerned investment adviser and follows up with them for redressal.
Fees from Clients
SEBI Regulation is not fixing any scale of fee to be charged by the Investment Adviser from clients. It is as per the agreement between the client and the investment adviser. Further, an investment adviser shall ensure that fees charged to the clients are fair and reasonable.
Distribution activities by RIA
If you are a SEBI registered Investment adviser, you cannot sell any financial products to your clients and earn commission. This rule is to ensure that you recommend the best-suited products to the client without any conflict of interest.
But RIAs other than Individuals can have a separate division for distribution! The adviser is required to segregate distribution and execution services. The investment advisory has to be provided by a separately identifiable department or division or through a subsidiary. Further, such distribution or execution services can only be offered subject to the following conditions: The client shall not be under any obligation to avail the distribution or execution services offered by the investment adviser or its affiliates. The investment adviser shall maintain arms length distance between its activities as investment adviser and distribution or execution services.
An investment adviser shall disclose to his client, any consideration by way of remuneration or compensation or in any other form whatsoever, received or receivable by him or any of his associates or subsidiaries for any distribution or execution services
Individuals registered as Investment Adviser can continue to receive the trailing commission for the distribution services provided by them prior to grant of registration as an Investment Adviser.
Who are exempted from SEBI registration?
Insurance agents or insurance brokers registered with IRDAI, pension advisors registered with PFRDA, who provide advice in various insurance /pension products are exempted from getting SEBI registration. Mutual Fund Distributors registered with Association of Mutual Funds in India (AMFI) can only provide basic advice to its mutual funds clients incidental to its distribution activity. They can also function without SEBI registration. Members of the Institute of Company Secretaries of India, Institute of Chartered Accountants of India, Institute of Cost and Works Accountants of India who provide investment advice to their clients incidental to their professional services are exempted from obtaining registration under IA Regulations.
Fee only financial Planners
If you are looking for a financial planner, it will be better to approach a fee only financial planner who is not into any distribution activities. Distribution through the sister concern can also defeat the spirit of fee only financial planning. You can get the list of fee only financial planners in India from SEBI website. A privately curated list is also available at freefincal.
Please join me in thanking Melvin for taking the time to write this instructive article. Please feel free to ask clarifications. Melvin will be happy to respond.
Are you a SEBI RIA? Do you suggest direct mutual funds only to your clients even if they do not ask for it? Then contact me and I shall be happy to include you in the above list.
Note: any employee who is employed with any firm is ineligible to apply RIA. Thanks to Muthuraman Rmb for pointing this out.