Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch’s harsh words at an event held by registered investment advisors (RIAs) quite sum up the mood of the market regulator. It is also reminiscent of her predecessors’ tough talk when the private sector mutual fund industry was at its nascent stages, and there was mis-selling galore. There is no doubt that financial advisory has become a necessity in India. The fact that there are only 1,300-odd advisors is a shame. Worse, as Buch pointed out at the event last week, only 900-odd, or 65%, were registered. But the main problem, especially after the proliferation of social media, is the quality of advice. One just has to spend a little time on the micro-blogging site X to see some horrifying tweets being doled out as financial advice. “Finfluencers” or financial influencers have been known to ‘nudge’ people to invest in initial public offerings or overpriced companies.
Some of these names even feature prominently on prime-time television shows and give advice on particular stocks and stock picking. These self-proclaimed financial gurus, with lakhs of followers, run investment advisory services online without any registration. Some even run educational courses on YouTube for hefty fees that teach investors to read technical charts. These courses are often bundled with “valuable stock tips”. On its part, Sebi has been taking strict action against them.
A few months ago, a prominent name in this growing tribe, who gave daily recommendations for a fee and offered packages for advisory services through his website, was banned from dealing with the securities market for a year. He was also directed to pay back Rs 6.07 crore to customers. Though there has been strict action against some others as well, there are many who continue with this practice.
The problem has become worse because retail investors have entered the stocks space in hordes in recent years. Since Covid, retail investors in the Indian stock market have been multiplying at a terrific clip. Currently, there are around 130 million demat accounts, and experts believe that by 2027-28, the number could rise to 250 million (addition of 2 million a month). The regulator’s frustration over the absence of a big enough pool of credible financial advisors who follow set guidelines and can be held accountable is understandable. But just venting frustration is unlikely to solve the problem. By Buch’s own admission, the country requires one million registered investment advisors (RIAs). But reaching that figure is a tall order. RIAs raise some very pertinent issues. For one, in the absence of any performance validation mechanism/agency, they cannot advertise or prove to potential clients that they are doing good work. It happens only through word of mouth. There are other entry barriers, too.
The requirement of a separate compliance officer, allowing hiring of only postgraduates with five years’ experience, and the need to give examinations regularly make the entire process very expensive and unattractive. It is much easier to become a mutual fund distributor or even an insurance agent instead of running an advisory service. Sebi should look at reducing some of the illogical entry barriers so that more professionals are encouraged to become RIAs. Like in every profession, there are some bad apples who should get exemplary punishment. But using a sledgehammer approach and painting everybody with the same brush may not be what the doctor ordered.