SEBI should first regulate advisory at the AMC level

Slowly SEBI is waking up to the fact that members of the financial services have not bothered to take its advisor regulations seriously and that stern action is necessary. Instead of focussing on individuals, SEBI should first force the implementation of advisory regulations at the mutual fund AMC level.

SEBI has clearly laid out regulations that

1) People who offer investment advice will have to registered as investment advisers.

2) Distributors cannot offer investment advice. They can only offer ‘incidental advice’. Goal-based investing and risk profiling is not incidental advice. They better not be!!

3) People who are involved in multiple activities (such in mutual fund distributor and insurance agent) must get registered as investment advisers. They would also be known as registered investment advisers.

Yet, distributors and financials planners have by and large either ignored it or found a way to shift distribution to a family member (Indian jugaad is the best jugaad!).

They are able to ignore the regulator because, unless there is a complaint, SEBI will not and cannot take action upon anyone for not falling in line.

That said, SEBI is ignoring a much bigger and more influential issue.

Mutual fund companies while promoting their products, add:

Investors should consult their financial advisors if in doubt about whether the product is suitable for them.

The advisor they are referring to are distributors. However, distributors cannot provide investment advice.

So SEBI must force AMCs to change the line to

Investors should consult SEBI registered investment advisors if in doubt about whether the product is suitable for them.

SEBI must also prevent AMCs from conducting workshops or seminars for distributors which involves aspects of investment advisory and financial planning.

I believe this will increase the compliance rate in the services (by how much remains to be seen).

Parting shot: Financial advisors complain about free lunch and unwillingness to pay for advisory. When most ‘advisors’ fail to follow rules, what right do they have to complain about investors? Trust is essential for fees. Compliance and competence are essential for trust.

Related post: Who on Earth is a Financial Adviser?!


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