How to make affordable financial advice readily available in India

Published: January 19, 2023 at 6:00 am

This article is an opinion piece on how to make affordable financial advice readily available in India. Financial advice here refers to financial advice without any conflict of interest. Or, in other words, fiduciary financial advice. That is advice that only has the best interests of the advice seeker in mind.

Having been around this arena for over a decade, I am fully aware that the suggestions mentioned below are far from practical due to opposing forces and the kind of criticism this article will likely meet. Nonetheless, I firmly believe they are the only way to ensure both parties – advisors and investors benefit.

What is the problem? Technically, theoretically, only those registered as investment advisors should offer financial advice in India. The eligibility for becoming registered is steep. A PG degree in finance and five years of experience are mandatory. While the latter is manageable, the former is hard for most people.

Then we have a 150-client limit for individual advisors. If they wish to breach this, they must have a net worth of Rs. Fifty lakhs and register with SEBI as a non-individual advisor. That is as a business.

SEBI’s intention here seems to be to dissuade shady individuals from becoming advisors and providing stock tips or bad financial advice. While well-intentioned, it also affects pure financial planners who do not offer stock advice or tips.

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The other aspect is affordability. The fees of most registered advisors are beyond the reach of many young earners and low-income families.

SEBI says mutual fund distributors can only offer incidental advice. This is an impractical rule. Investors routinely ask distributors for advice, and SEBI cannot stop them from doing so.

So “affordable” advice in India is often commission-based. Most Indians cannot afford to work with a SEBI-registered investment advisor.

What is the solution? 

This a gentle reminder that the following is only my insignificant opinion. Nothing is ever going to come out of it.

The aim here is to make financial advice affordable and eliminate conflict of interest as much as possible.

  1. Categorize RIAs as per the nature of their work as SEBI registered stock advisors, SEBI registered financial planners etc., with individual eligibility requirements.
  2. Remove the requirement of PG qualification for at least SEBI-registered financial planners.
  3. Remove the barrier of 150 clients for those who practice only financial planning.
  4. Eliminate the option to charge fees as a percentage of assets. This is a proxy for trail commissions and has a conflict of interest. Remove the ceiling on flat fees.
  5. Eliminate the link between mutual fund distributors and AMCs. Redesignate all distributors as SEBI-registered mutual fund advisors. They get a constant commission from the amount invested and not on the market value of the total investment, and top of this, they can charge any flat fee for advisory on mutual funds.
    • The commission now is the same whether the money is put into an overnight or sectoral fund because it only depends on the amount invested and not its current market value. There are no extra benefits or perks associated with recommending an NFO. So the conflict of interest is removed to a large extent.
  6. No product manufacturer can have any direct or indirect tie-up with any SEBI-registered individual. This includes events or personal sponsorships of any kind.
  7. A person can be a SEBI-registered financial planner AND a SEBI-registered mutual fund advisor. Other combinations like registered MF advisor and stock advisor or registered financial planner and stock advisor should also be allowed to ensure earning options are not limited.
  8. No service be it robo advisory or direct plan distribution, should be offered for “free”. The investors’ data should not be sold to any other entity, even if it is personally non-identifiable. No product manufacturer should have access to such data.

Many mutual fund distributors may get angry at the above suggestions. However, if one can work as a registered mutual advisor and a registered financial planner (or stock advisor), there is no limit on income. I firmly believe this will elevate their status as respected advisors and mutual fund experts instead of being seen as intermediaries, agents, or sales guys.

This is 2023, and the old excuse, “Indians are not willing to pay for advice, ” is no longer true. Indians are happy to pay for honest and reasonably priced investment advice.

I don’t claim the above suggestions are foolproof. Still, I believe they are necessary to make financial advice affordable by lowering the barrier for SEBI-registered entities to function and elevating the status of mutual fund distributors.

We should not limit the earning potential of any SEBI registered entity, but at the same time, ensure there is little or no conflict of interest in the advice provided, which is, of course, not easy to pull off.

The above system will result in readily affordable and nearly conflict-free advice. SEBI cannot force registered advisors to lower their fees, but SEBI can offer a conflict of interest-free alternative at lower price bands. By allowing more individuals to become registered advisors, we will have a much broader range of fees than is available now.

Those who cannot pay for a full financial plan pay only for unbiased product suggestions (this is not ideal, but it is up to the investor to make this choice). Such suggestions would be customised to the individual’s requirements and based on risk appetite.

As mentioned above, I am acutely aware that these suggestions are impractical because big guns like banks would vehemently oppose any commission reduction. Still, I would like to stick to my dream.

SEBI has so far played three roles. That of a product regulator and promoter, and protector of investor interests. It should shift its focus to putting investors and advisors first and leave the product manufacturers to survive by natural selection (within regulations).

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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