Investment Advisory regulation in India is in its infancy. This is unchartered territory and hence there is no readily available tried and tested template for use here.
Idealism and good intent marked the birth of the IA Regulations in 2013. Predictably, the wheels bearing the regulatory chariot were not perfectly smooth. That started a series of consultation papers, each exhibiting its own singular thought process that resulted in a lot of confusion as to the regulatory direction.
IA Regulation had put together disparate participants under the same umbrella. Stock tip providers came under Advisory Regulation when they were actually not giving any “advice” as much as they were assisting in speculation. There were lots of malpractices and thousands of complaints against them.
The new IA Regulations of 2020 attempts to overhaul the regulation while at the same time cutting these stock tip providers to size and their capacity to create problems. Also, the new avatar is boxing in true advisors in various ways and has the potential to stunt the advisory profession itself, while not exactly being able to rein in the stock tippers, considering how well funded they are. It is like the chemotherapy to weed out the cancerous cells. It is certainly killing a whole lot of healthy cells as well!
They should have been under a regulation for Stock market participants like Stock broking. But they are not.
IA Regulation Pros
Admittedly, there are good points in the regulation. SEBI has solved the problem of conflict of interest in advisory & distribution by the same entity, by bringing in client-level segregation. Similarly, enforcing the engagement agreement between advisor and client and insisting on various points and provisions there, is positive. There are some others as well.
IA Regulation Cons
But, the regulation has spawned a litany of woes for the advisory community. Chief among them is the outlawing of Continuing Education credits to renew professional certifications for the purposes of Complying with IA Regulations. IAs will now have to keep writing a gatekeeper exam from time to time, which does not serve any purpose. This is unprecedented & unheard of anywhere in the world in respect of any professional certification. This also poses a business continuity risk for IAs.
A better implementation would simply have been a refresher module on new developments in the profession, like for MF distributors.
Also, this diktat brings in conflict of interest in that it seems to favour NISM ( a SEBI arm ), whose exams are to be taken every three years as opposed to every year for other certifications.
The post-graduation education prerequisite, along with five years’ experience for IAs ( along with the certification requirements ) is going to exclude many who want to embrace the profession. Also, the advisors under them will have to comply with these norms, with a minimum experience requirement of two years. Recruiting such people is a huge challenge and raises costs enormously.
Compulsory corporatisation clause when one reaches 150 clients is troublesome. It assumes that individual advisors would not be able to handle more than 150 clients when the regulation explicitly permits Persons associated with investment advice (PAA) to assist them. This allows them to handle any number of clients provided they have enough advisors to handle the load.
Along with the above, the second condition of Rs.50 Lakhs Networth for the corporate entity is the killer. How can an individual advisor who is a few years old have the heft to invest Rs.50 Lakhs in a corporate entity?
The other contentious point is about fees – fee capping in fixed fee, diktat on using one type of fee charging for a year, how much can be collected as advance etc. bring in unnecessary rigidities and hamper advisors’ ability to appropriately charge for their services.
How to make IA regulation work?
A sledgehammer approach would forever stunt the industry. Small changes to the IA Regulation would make the regulation supportive of genuine IAs who have chosen to embrace it.
Firstly, allow IAs to renew certification after going through a refresher module and not write the same exam again and again.
Secondly, Compulsory corporatisation should be based on Turnover and not number of clients. A Rs.10 Crore turnover is a feasible level if compulsory corporatisation is to be enforced.
Thirdly, reduce experience requirements for IAs to two years and for PAAs to nil. Also, for PAAs, the compulsory education level should be graduation, not PG. This will help new people get into the industry and IAs will be able to recruit talent & groom them to be good advisors over time.
Lastly, the stipulation on fees should be done away with as it is tantamount to micro-management. The fee charged should be left to market forces. An upper cap of 2.5% at the AUA level is fine. It is not as if the client will pay any fee that an advisor wants to charge.
What is suggested are small tweaks without changing the thrust of the regulation. But it will go a long way in making the profession viable and vibrant.