How to choose an SEBI registered investment adviser

Published: October 7, 2015 at 9:21 pm

Financial services in India are regulated by SEBI. Only those registered as investment advisers with SEBI (SEBI RIAs)  are authorised to provide financial planning advice. SEBI recently warned the public not to engage with anyone who is not a registered investment adviser. If you are looking for financial advice, here is how a SEBI registered investment advisor can be chosen.

The idea behind the investment adviser regulations is to eliminate conflict of interest. Those who distribute products regulated by SEBI (mutual funds, shares, bonds) can only offer “incidental advice” about the product.  They cannot offer investment advice.

Those who offer investment advice cannot earn from product commissions. Unfortunately the stipulation here is weak. SEBI RIAs are suppose to maintain an “arms length” relationship from product distributors. In my opinion, this has been conveniently interpreted.  RIAs have chosen to “shift” their distribution business to their spouses, parents, children etc.

The total number of RIAs are extremely small in number. A majority of those in financial services have not bothered to comply with SEBI regulations. I believe the investor community should shun those who have not complied. SEBI say so too.

That said, because of the convenient interpretation of the arms length rule, not all SEBI RIAs are the same. Hence this post.


How to choose an SEBI registered investment adviser

Step 0:  Choose only those registered as individuals. Others (Body corporate,company, limited liability partnerships and others) most likely would have a tie-up with a distribution partner (a close relative or friend) through a “separately identifiable division” (SID).

Stay away. Choose only  those registered as individuals

You can know about their registration status here: List of Registered Investment Advisors

Step 1:  

If you are going to invest in stocks, the SEBI RIA or any of their relatives or associates should not be broker. Get stock advice and invest where convenient, say via your bank.

B If you want to invest in mutual funds, decide whether you want to choose direct plans (and earn about 0.5 to 1% more return for each year of investment) or if you want the “convenience” of regular mutual fund plans.

Get investment advice from the SEBI RIA and “go direct”. Or get investment advice and buy regular plans from your bank or online distribution portal. Do not buy them from anyone suggested by the RIA, their relatives or associates.

So the idea is simple, pay for investment advice alone and invest via an independent third party.

If you are clear about how you are going to manage this step, then choosing a SEBI RIA become so much more simpler.

Step: 2

Recognise that it is not possible for an investor to judge the competence of a investment adviser with just a few interactions. The proof of the pudding is in the eating and the pudding (financial goals) is not yet ready (achieved).

So referrals do not help much, except perhaps find out how the RIA behaves (see below) after the ‘financial plan’ is ready.

So choosing a RIA is pot luck!

Step 3:

Any selection process requires a shortlist. If you require some help, I have a SEBI RIA list of fee-only financial planners in India. This is neither an exhaustive list nor a recommendation, just a starting point.

If you don’t like this,  create your own shortlist by following steps 4 and 5. Even if you use the shortlist, steps 4 and 5 are crucial.

Step 4:

When you begin the interaction with SEBI RIA, make it clear to them that you will not invest “via them or via any agency recommended by them”. Look at their facial expressions carefully.

If they don’t bat an eyelid and are perfectly okay with your strategy, you can move forward. If they appear disturbed and make excuses like, “we cannot keep track of your portfolio”, etc, end the conversation then and there.

Read more: Pay for Financial Advice, But Insist on Direct Mutual Fund Plans (even if you want the convenience of regular plans via an independent third party).

Why end the conversation? Because Portfolio management is possible without AMC Feeds!

Step 5:

Now that the SEBI RIA has not issues with you investing via a third party or direct plans, next come the issues of comfort level and fees.

‘Comfort levels’ are subjective and you are the best judge. When it comes to fees, I recommend a fixed fee for plan creation and a fixed fee for review.

Many charge a fee linked to the size of the portfolio. I am not a fan of this.  I am also not a fan of the adviser obtaining account statements (a fancy term for AMC feed) of direct plans via third parties.

The idea is quite simple. You pay for financial advice and invest independently (with or without paying trail commission). The investment plan is periodically reviewed by the SEBI RIA periodically.

It is our money. No one cares about it like we do. Let us help SEBI eliminate conflict of interest in the financial services industry and deal only with SEBI registered investment advisers who encourage clients to invest ‘independently’.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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