SEBI Consultation Paper: Stock Analysts Will Thrive; Investment Advisers Will Wither
The Securities and Exchange Board of India (SEBI) has unveiled a consultation paper to revise the regulatory framework governing investment advisers (IAs) and research analysts (RAs). Among the suggested ideas are relaxation of entry criteria, such as minimum qualifications, certifications, and net worth requirements; allow part-time IAs, RAs, and independent compliance officers, and relax the definition of ‘principal officer’. Will these and other changes proposed by the new framework achieve SEBI’s objectives? 
 
Over the past few years, the Indian stock market has attracted crores of new investors. But, as the consultation paper points out, “the number of IAs/RAs today is not commensurate with the large investor base... This is leading to the proliferation of unregistered entities acting as IAs and RAs.” SEBI wants the services of IAs and RAs to be available to more investors for which “a much larger number of IAs/RAs is required.” Will the proposed changes achieve this laudable objective?
 
The Menace of Illegal Advisory
In an ideal world, investors’ primary source of information should have been the traditional business media and, better still, SEBI-registered investment advisors and research analysts. But like moths to the fire, millions of investors are attracted to social media for investing wisdom. This is the domain of self-styled investment gurus, trainers and influencers, who are all functioning illegally if SEBI rules were to be strictly applied. Collectively, they are a formidable force. While SEBI has attempted to crack down on many of them, it takes a lot of hard, painstaking work to investigate and establish facts, give them time for reply, make out a case, issue a show-cause notice and then pass an order. 
 
There are two major issues with using legal action to control illegal advisory. One, the penalty is usually too meagre to act as a deterrent. An adviser who did not perform the know-your-customer (KYC) process as required under the Prevention of Money Laundering Act (PMLA), did not do risk profiling, had no records to show for suitability of advice and investment rationale, and did not have an audit done, among the many violations his firm was guilty of, got away with a fine of only Rs6 lakh. 
 
The second problem with SEBI’s battle against illegal advisers is that many of them have become smarter. They couch their services as training courses, after advertising the high returns they have notched up. It turns out, these trainers are hopeless traders and investors, as their leaked income-tax returns show. They can be accused of misrepresentation and cheating, but it is up to investors to file such cases. SEBI can act only when they impart buy and sell advice of SEBI-regulated products such as stocks, mutual funds and bonds, not for false claims of their investing or training prowess. The net result: the tribe of influencers will keep growing – until, of course, a bear market starts when influencers would stand discredited and investors would leave the market in droves.
 
Can the new relaxed norms proposed by the consultation paper wean investors away from the overwhelming tide of influencers, and encourage them to approach registered advisers, as SEBI hopes? The suggested changes make it easier to register as an adviser or analyst, but the entire gamut of onerous record-keeping, disclosure and audit requirements has been left untouched. SEBI has also added more paperwork now that regulating IAs/RAs has been delegated to a third party, the Bombay Stock Exchange-owned BSE Administration & Supervision Ltd.
 
The current rules require advisors to perform objective risk-profiling of clients which should include financial details, including goals, preferences, borrowings, current investments, savings, expenses, personal taxation and so on. IAs have to record the suitability of products recommended and also the rationale of every piece of advice provided and must have a documented process for selecting investments based on the client’s objectives and financial situation. Advisers cannot accept fees through credit cards and have to sign lengthy and intricate investor agreements (26 clauses) which can be overwhelming for clients and resource-intensive for IAs. IAs also have to maintain records written and signed by them, telephone recordings, emails, SMS messages and any other legally verifiable record for five years.
 
Just three months ago, SEBI announced that every six months advisers will have to declare to BSEASL dozens of minute operational details over eight pages such as shareholding pattern, beneficial owners with more than 10% capital, number of clients, advertisement details, distributor commission, details of social media handles, details of bank account/s for receiving advisory fees, details of contact person, principal officer, advisers providing advice, details of managing director and other directors. 
 
While SEBI has a justification for all this, such record-keeping, disclosure and tightened audit norms will keep the advisor population stunted. I am not suggesting that these norms should be relaxed. The fact is investment advice is a small business segment, if done in the right way. Like insurance, there is no natural pull – investors are not seeking it. This is why there are hardly a few hundred investment advisers even as the total demat accounts has exploded to over 160mn (million) or 16 crore. The issue at hand is not just strict entry criteria being relaxed. The ratio between the effort of following the SEBI rules and the reward that the business brings, is simply not attractive enough.
 
The silver lining is SEBI’s effort to redefine the research analyst’s work. Currently, it is a confused piece of regulation, designed principally to cover analysts in investment banks and brokerages, while imposing onerous and meaningless requirements for independent analysts. Although the paper prescribes much more documentation for analysts, it also clarifies their roles, allowing them to offer ‘model portfolios’ which, under the current rules, is considered investment advice. 
 
Given that almost all investment advice in real life is stock-related, there will be a sharp rise in RA registrations and platforms that were illegally offering model portfolios will become legit. Meanwhile, investment advisory will remain a struggling profession, governed by an elaborate but irrelevant pile of rules. This will be unintended but not a bad outcome. 
 
As I said, investors look for only stock-related advice, which RAs may be allowed to offer, assuming the recommendations are accepted. Holistic financial planning and advice, the job of IAs, attracts too little interest from customers while making too much demand on the providers of investment advice. A few years later, SEBI may have to do another revamp of IA regulations. 
 
(This article first appeared in Business Standard newspaper)
 
Comments
adityag
2 months ago
"This will be unintended but not a bad outcome." -- care to elaborate on this? It's a terrible outcome.

With fewer fiduciaries, savers will have no idea how to behave in tumultuous times, particularly bear markets.

Intermediaries masquerade as advisors anyway. Even PMS managers and research analysts call themselves advisors! I'm not making this up.

At this point, I'm sorry to say but SEBI is a joke.
saran2sai
2 months ago
True. Holistic investment advisory job has some risks for themselves, while anybody can practice as RAs with risks passed on to retail investors.
DineshA
2 months ago
Root cause of all problems is that people want advice free, don’t think it’s worth the fees, which in many cases maybe negligible to the amount they invest. Plus I know better attitude which no rules or regulations can deter. You tubers & telegram channel advisors are laughing all the way to bank. Only prolonged bear market can cure this disease.
saran2sai
Replied to DineshA comment 2 months ago
True. But prolonged bear market is not only a good medicine for "such persons", but also for those who don't need medicine !!
parimalshah1
2 months ago
With these changes many will burn their fingers following such advisors. End result will be people will lose faith in all advisors and only believe the analysts. Good move.
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