January 16, 2017

Fee for Advice is the journey which needs to be completed – SEBI

Sadique Neelgund

Fee for Advice is the journey which needs to be completed – SEBI

SEBI after its International Advisory Board (IAB) Meeting on January 14th released a Press Release which has brought a great relief to IFAs and Mutual Fund Distributors. It looks like SEBI has finally realized the ground realities of a fee-only advisory model in India. For those who have not yet read the press release, here is the link – goo.gl/LU4PS8

This is definitely great news for IFAs/Mutual Fund distributors. Through this press release; regulator has acknowledged several ground realities like a need for co-existence of both advisory & distribution models, need for a financial viability of advisory model, need for calibrated gradual transition to advisory model, different levels/types of investors in market place and different models to cater to each.

The credit for this goes to many of the IFA associations & industry bodies across India who had responded to SEBI’s Consultancy Paper on RIA Changes. Special appreciation goes to FIFA & United Forum which has been very actively advocating on behalf of IFA community to various regulators and finance ministry. Even Network FP had sent its response to SEBI categorically mentioning the need for co-existence of both models, here is the link – goo.gl/zjp8OZ

What Might SEBI do Next?

Going by the press release, it looks like SEBI will figure out a way to ensure both the models co-exist while fixing the gaps and loopholes in both the models. SEBI in all probability will release amendments to SEBI Investment Advisor Regulations but with dilutions to ensure Mutual Fund Distributors continue to give basic/incidental advice and earn commission from products sold. But may put some restrictions on the use of nomenclatures like an advisor, financial planner, wealth manager etc. And may increase product suitability standards for distributors and bring in more transparency of commission disclosures.

One of most important sentences in the Press Release is “Fee for advice is the journey which needs to be completed”. SEBI is pretty much clear about its destination, but it now wants to reach there without hindering the current growth and causing much pain to Indian investors and Mutual Fund Industry.

While making it easy for distributors to continue their existing practices, it might keep promoting RIA Model by making direct plan transaction more efficient, cracking whips on financial intermediaries not complying, creating public awareness etc. It might now create a proper long term transition plan vis-à-vis adhoc drastic transition which was being expected earlier. If this happens, it’s great for all.

What Should IFAs do Next?

Some of the IFAs reached out to me asking what should be their next logically step. Based on a current situation and SEBI’s press release, my best advice to IFAs is to figure out a way to do both – Fee Based Advisory (RIA) and Commission based Distribution (IFA).

If you study the current structures of all existing RIAs doing financial advisory (not stock tip providers), most of them have figured out a way to do both – Advisory and Distribution – and have both commission and fee income streams. They are functioning either as private limited companies which can do both by creating a separate division or as individuals by off-loading their distribution practice in a different legal entity.

Having both practices gives a financial advisor great flexibility and creates more opportunities. You all know the benefits of doing commission based distribution, let me share a few thoughts on why having fee-based advisory (RIA Model) is equally important & helpful;

1. Do comprehensive financial planning which is essential for long-term client engagement
2. Earn additional income from first time planning fees and ongoing renewal fees
3. Offer Direct Plans to sophisticated investors who ask for it and earn fees for advisory
4. Offer Fee-based value added services like Estate Planning, Income tax, Life Planning etc
5. Become future ready for a fee-only environment, if and when it happens.

But remember one thing, the additional income from fees comes with having a RIA License and adherence to RIA compliance. So you have to put more efforts for higher opportunities.

I am yet to see a very successful FEE-ONLY financial advisor in India. Hence would never recommend it to anyone, at least for now. A doctor inside a clinic; should be earning more than the chemist outside. It’s that simple. Till the time regulators create an environment wherein doctors earn more than the chemists, its best to be both but ensure you are keeping your clients interest foremost always.

Client first, Products next – this approach should get deep into every advisors DNA. Everything else is secondary.

6 Thoughts to “Fee for Advice is the journey which needs to be completed – SEBI”

  1. Venkateswaran M says:

    Sadique, this is the not the “Board” meeting of SEBI. This is the meeting of International Advisory Board of SEBI, right?. From what I understand, these are recommendations to SEBI, which may not be binding. These recommendations may or may not be adopted in the same form by SEBI. We have to look at the previous six IAB meeting recommendations to see how much of their earlier recommendations have been adopted by SEBI.

    • admin says:

      Venkateshwar… very valid point. Since the SEBI Board press release is completely silent on this matter, I think they will buy more time before finalizing anything and also may not do drastic changes as envisaged earlier.

  2. admin says:

    Great to know you have started the journey… All the best !

  3. admin says:

    Do make a cost / benefit analysis before moving forward

  4. Sukhvinder Sidhu says:

    Very balanced view to lead advisers at large in the current situation!
    Somehow I feel that the doctor in a clinic ideally starts his profession to serve people independently, unaware of the earnings of the chemist outside. He does not wait for others to create right conditions for him, but depends only on his commitment and expertise to grow his ‘business’. Success for him may be different…
    Off course, I am not talking about the larger hospitals. The above may seem to be ideal, but we all look towards ideals to be rightly practical, isn’t it?
    “…its best to be both but ensure you are keeping your clients interest foremost always.” Is it really possible keeping both ways?

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