Next time you choose your financial advisor, ensure that the person is either a CA or an MBA in finance or has a similar qualification from a recognised university. If not, then a decade-long relevant experience and a certification from the National Institute of Securities Management, or any such organisation approved by the Securities and Exchange Board of India (Sebi), is a must.
The market regulator has proposed these minimum qualification requirements and a host of other rules for investment advisors and intermediaries associated with the securities market.
Sebi has invited public comments till October-end on the concept paper on regulation of investment advisors, and financial planners say the final guidelines are likely to come out by the mid-November. ?Financial products are intangible and conceptually more difficult to understand. The payoffs are in the distant future and can be camouflaged by several factors external to the product. It is in this context that the distributors occupy a key role, considering the low levels of financial literacy and awareness in India,? says the Sebi note.
Typically, financial advisors or agents receive their commissions either directly from the manufacturers or from the investor in the way of deductions from the investment amount as was the case with mutual funds (where they deducted 2.25% of the amount invested by the investor as entry load). However, Sebi banned the practice from August 2009 and, as a result, assets under management of various fund houses dropped sharply. Moreover, some agents also get advisory fees from investors and it is seen that distributors often churn the investor’s portfolio to earn more commission.
All that is going to stop now as the investment advisor has to do adequate risk-profiling of the investor and advise products that are suitable. The market regulator has said that the record of such risk-profiling and investment advice should be maintained by the advisor. The records, which include audio recording of any oral advice given, will have to be maintained for at least five years. ?Though it is not clear in the Sebi concept paper as to why should one preserve the risk-profiling of the investor for five years, it is likely that, if the advice goes wrong, it can be challenged at some grievance redressal level,? says Pankaj Bhambre, a certified financial planner.
However, Sebi has underlined that the investment advisor will not be liable for criminal or civil liability on the advice given unless it is negligent or mala fide in nature. Any dispute between the investment advisor and the investor would be resolved through a grievance redressal or arbitration mechanism created by Sebi.
To reduce any ambiguity in the fees paid by the investor to the agent, the latter will have to clearly indicate the fees that will be required to be paid by the investor.
The advisor, however, cannot accept securities from investors and non-individual investment advisors who offer execution services, like broking, custody and accounting, and will also have to make adequate disclosures.
Portfolio managers who provide only investment advice need to be registered only as investment advisors after their present registration expires. For this, the required amendments in the Portfolio Manager Regulations would be done. A person who is not engaged in the business of providing investment advice and, if the business advice is solely incidental to some other business, the person will be exempt from the minimum qualification requirements. Secondly, in the case of an advocate and solicitor or a law firm, which offers financial advice solely incidental to his/its legal practice, then these requirements will not be applicable.
Experts have hailed the series of investor-friendly changes. Says Vinay Agrawal, executive director, equities broking, Angel Broking, ?The simplification and rationalisation of trading account opening process eliminates the agreements which the investor used to execute for opening a trading account and, thus, the account opening charges get reduced to that extent. The investor is also saved from signing some of the multiple documents, which he does to open trading account.?