October 27, 2016

Network FP’s Response to SEBI’s Consultation Paper on RIA

Sadique Neelgund

Network FP’s Response to SEBI’s Consultation Paper on RIA

Dear Sir

Network FP is a Pan-India membership organization for Certified Financial Planners (CFP), Registered Investment Advisors (RIA), Independent Financial Advisors (IFA), and other personal financial professionals. Our objective is to help financial advisors develop and grow a client-centric, process-driven and knowledge-based advisory practice.

This letter is Network FP Members’ response to SEBI’s Consultation Paper on Amendments / Clarification to the SEBI (Investment Advisers)Regulations2013. The draft of this letter doesn’t strictly follow the format in which SEBI has sought the response; as we wanted to share our thoughts at a macro level and the ideal way forward for both Investment Advisors and Mutual Fund Distributors. We request you to consider accepting this format.

The views and suggestions expressed does not reflect any one particular community i.e. of advisors or of distributors but takes a balanced approach in which both these communities can flourish, be of service to all kinds of investors and complement each other’s services. We request you to consider these views before making final amendments to IA regulations and also while drawing a long term roadmap for both the communities.

Need for Both – Fee-based Advisors & Commission-based Distributors

India is very diverse country with different types of informed & uninformed investors at different social strata with different requirements and varied behavioral traits spread across urban and rural pockets of the country. Considering this, the regulator is requested to create an eco-system to promote different advisory & distribution practice models and let investors decide whom they would like to approach based on their requirements /preferences.

A fee-based advisory model will work well with the informed investors. However, if we are aiming for financial inclusion wherein even small retail investors & uninformed investors are participating and benefitting from the capital markets, there is a clear need for commission-based distributors. We request the regulator to take a balanced approach towards both models i.e. advisory & distribution.

The advisory & distribution community would like to supplement regulators efforts in empowering the consumer to better manage their personal finance affairs. Given that we are one country with many nations, we think that our vibrant society would benefit with diverse models by which an adviser / distributor can be engaged.

There is definitely a way to create an ecosystem wherein both advisors and distributors survive and grow complementing each other’s services and be of great service to all kinds of investors in India. We request the regulator to create that ecosystem. Below are some of our views and suggestions to create such an ecosystem to kindly consider;

Fee Based Advisory Model (Advisors)

We would like to thank the regulator for giving a 3-year window for MF Distributors to transition to Advisors. This is a good enough time for a successful transition for those who are serious about it. Most of the forward looking MF Distributors are not averse to transitioning to RIAs& adhering to stricter compliances; but lack confidence in Fee-based RIA Model. They are uncertain about the survival and success of the model in India. Even the existing RIAs and the aspiring RIAs entering the field need to be given confidence in the future of profession. Hence we request the regulator to consider following points to help RIA community succeed;

1. Facilitate Auto Debit of Advisory Fees

The biggest concern in fee-based model is the the mode of collection of advisory fees on a timely basis for the first time as well as during renewals. An auto debit option from the client’s investment account or bank account based on a pre-defined ‘advisor-client agreement’ will go a long way in the success of a fee-based RIA Model. This will help RIAs to focus on delivering value for the fees they are charging instead of being worried about timely payments. The regulator is requested to facilitate this process by asking the technology platforms like R&Ts / NSE / BSE / MFU to provide this facility with the help of many of the evolving online payment mechanisms.

2. Make Direct Plans Execution Seamless

RIAs would mainly be recommending Direct Plans of Mutual Funds as they would be compensated by fees for their advice and handholding. Ensuring execution of their advice and reporting thereafter, would be primary responsibility of an advisor leading to fulfillment of client objectives. AMFI’s circular of 17th Nov 2015 on direct plan data feed is still not implemented in spirit.To that extent, regulator is requested to make direct plans execution through RIAs seamless by asking AMFI, R&Ts, AMCs, Exchanges etc to streamline process for ensuring proper feeds of direct plans at client’s PAN level & fund house level are provided to RIAs and RIA supporting technologies.

3. Allow Composite Models to Exist

Investors want a one stop solution which can cater to various needs; right from advisory to execution services. Investors expect convenience along with fiduciary & unbiased advice. RIAs will be required to provide ‘One Stop Solution’ to attract & retain clients. SEBI has allowed Corporate RIAs to carry out distribution services through a subsidiary company. Even Individual RIAs should be allowed to offer distribution services through a different legal entity or by having a formal tie-up with a Distributor or a Corporate RIA. To remove conflict of interest, regulator may propose adequate disclosures, and separate processes for both.

4. Reduce Corporate Registration Fees

RIA Registration for corporate entities was increased from Rs. 1 Lakh to Rs. 5 lakhs. While this increased fee may suit well for Banks and NBFCs, this is a big deterrent to boutique financial planning and wealth management firms with team sizes of 3 to 30. These boutique firms would prefer to corporatize their practices by having a private limited company / LLP but cannot afford such high fees and fulfill higherNetworth requirements. Regulator is requested to reduce this fees to a level where in it matches AMFI’s Corporate Membership registration fees (which is currently Rs. 40,000) or create another category of registration with lesser fee structure for boutique advisory firms who have grown or aspire to grow beyond being individual advisors. Also it will be of great help, if IA registering fee is collected on an annual basis instead 5 years upfront which is currently applicable.

5. Tax Advantages on Fees Paid

Fee-based advisory can get an excellent boost if some tax reliefs are provided to investors on the fees paid for advisory services. Two areas where this can be done are; first, fees paid for investment advisory services may be allowed as deduction similar to health insurance premiums & health checkup fees allowed as deduction under section 80D. Second, fees paid towards investment portfolio advisory should allowed to be set off against capital gains from the portfolio being advised. Regulator is requested to take up these matters with respective authorities & the finance ministry and keep a proposal on introduction of these tax benefits.

6. Recommendation based Product Sales

Chemists sell some medicines based on doctor’s prescription and some medicines are categorized as the over the counter (OTC) and are sold without prescription. Similar categorization should happen with the investment products. Many of the complicated investment products like Structured Products, PMS, AIFs, Stocks, REITs, which come under the domain of SEBI should be sold by the product manufactures and their distributors only based on the written recommendation by RIAs. This will ensure investor protection as well as raise the profile of RIAs in the eyes of investors.

7. Facilitate Creation of Body Representing RIAs

We request the regulator to aim at creating and promoting ‘Investment Advisory’ as a well-respected profession on lines with that of doctors, chartered accountants, company secretaries etc. The current number of registered investment advisors may be very small, but this is the right time to facilitate creation of an organized body focusing on creation and promotion of RIAs. The regulator is requested to encourage and support existing RIAs to come together and form such a kind of body. This body can be a liaison between regulator and advisors, do advocacy campaigns, engage with media, lay down standard practice guidelines & formats, prepare standard fee schedules and work on attracting new talent to the profession. The body may also eventually grow into SRO.

8. Mass Awareness Campaign

The public at large must be made aware of this new breed of professionals called Registered Investment Advisors (RIA) and the benefits of fee based advisory services. While existing RIAs are doing some awareness activities in their individual capacities with help of media, a regulatory intervention to promote RIA as investment professionals through media awareness, mass media campaigns and through investor awareness programs will give confidence for existing RIAs, aspiring as well as transitioning advisors to take up the RIA model. Regulator is requested to consider collaborating with RIAs for such investor awareness campaigns. A dedicated budget should be set aside on a yearly basis for the next 3-5 years just the way SEBI has mandated AMCs to set aside 2 basis points for MF awareness.

Commission Based Distribution Model (Distributors)

Mutual Fund distributors are playing a very important role of ensuring small retail investors participate and benefit from the capital markets. With the growing popularity of mutual funds, there will be many investors wanting to take only execution services with just product recommendations and not comfortable in paying fees for basic advice. Hence RIAs will not be able to cater to them. If they are not catered to by the distributors, there is high likelihood of them getting into wrong hands again or continue with their existing investment preferences of real estate, gold and fixed deposits. We request the regulator to treat the role of MF distributor as important in creating an investor friendly ecosystem. The following points will ensure MF distributors co-existence with RIAs;

1. Allow giving Product Recommendation

The proposed amendment (Ref. 4.1.4.c) does not allow Mutual Fund Distributors to recommend any particular product except for describing product specifications. With this proposal implemented, MF Distributors will practically have no role to play which can justify their compensation through commissions. Mutual Fund Distributors should be allowed to play a role beyond mere transaction (which in the new environment will anyways go digital). MF distributors can play the role of being MF product counsellors and experts helping investors to choose the right product from thousands of products and schemes available in the market. This role of a counsellor will help them rightfully earn their commissions.

2. Allow Nomenclature “Mutual Fund Counsellor”

The proposed amendment (Ref. 4.1.4.c) asks those engaged in distribution of mutual funds to use nomenclature ‘Mutual Fund Distributors’ only. If distributors are allowed to do product recommendations as requested above, they should be allowed to call themselves as “Mutual Fund Counsellor” or “Mutual Fund Representative” or something similar. Researching the entire gamut of Mutual Fund products, filtering them and giving out appropriate product recommendation requires certain level of knowledge and skills for which they deserve a little better nomenclature then “Distributor” a term which is not held with high regards by consumers. Additionally, those distributors who have rightfully earned designations like “CERTIFIED FINANCIAL PLANNERCM” should be allowed to use their certification designations.

3. Consistency in Commission Payouts

SEBI may be concerned that there is possible conflict of interest &mis-selling in advising MF schemes due to different incentive structures. Yes, currently the commission ratios are different for different schemes/houses, because of which some MF Distributors may be enticed to select/push higher commission schemes/houses. To curb this, SEBI can specify the same commission structure for all schemes of the same category (equity/debt/liquid) across all fund houses. Also no other incentives from product manufacturers should be allowed which can incentivize biased recommendations or promote mis-selling.

4. Subject Distributors to rigorous compliance & processes

While allowing distributors to do product recommendations and a better nomenclature, the regulator may subject the distributors to more stringent product recommendation processes, proper documentation of each product recommendation and auditing of the process on a regular basis. Distributors just like RIAs may also be subjected to audits for proper disclosures, documentation, communication with clients and various processes.Also, the level of AMFI/NISM examinations for MF Distributors may be increased. Further, in the interest of deterring mis-selling, an Ombudsman could be set up to handle cases of mis-selling or bad practices.

The draft of this response has been reviewed & approved by majority (99%) of the Network FP Members who comprise of CFPs, RIAs, & IFAs. We request the regulator to positively consider the points shared above. For any further clarifications on the above mentioned points or for further discussions, Network FP’s Advisory Board would be glad to make itself available and meet the SEBI officials.

On behalf of Network FP Members
& Network FP Advisory Board

Sadique Neelgund
Director& CEO
Network FP

16 Thoughts to “Network FP’s Response to SEBI’s Consultation Paper on RIA”

  1. Harshil Roy says:



    Point #3 in RIA model and financial inclusion is great point to cover. More importantly commission across inddustry based on category of product would be the most obvious choice since beginning of commission is the only factor that can creat bias but small AMCs may suffer due to this.

    But I am in full support for each word that you have mentioned in this response.

  2. Yogesh says:

    Dear Sadiue , your response is well drafted and covers very valid points.

  3. Vital Pathuri says:

    Hi Sadique,

    Rightly placed.

    I feel , if in case the SIDD setup is to be stopped and subsidary model has to be adapted in corporates. The process shall made easy , with out the interference of the client (physical forms for COB ),as its a subsidiary.

    Like the changes in change of broker , AMC agreements , AMFI registration and other related works for a newly formed entities. Well this is apt only when proposed amendments are published. Yet we shall point it out.

  4. Fantastic representation. Brilliant and we are in full support of this draft. Thanks to the entire Team of Network FP.

  5. Nicely produced Network FP Team. Points very innovatively covered.

  6. Amalaraj Marian says:

    Hi Sadique,
    Well articulated, a holistic view in this are would be well received and whole hardheartedly supported. Still there are so many Mutual fund Advisors who have worked much better than some CFPs or people with professionally qualified people. They have stood by their investors thick and thin to ensure they created wealth. Don’t they fully deserve the earning then?
    There was a short coming in the system and the structure where they are not fully assured to the earnings. You have nicely put the point for a systemic approach to this problem.
    only one word “GREAT”

  7. Good efforts. However, RIA & MF Advisors both play a similar role
    (till RIA concept was born we all were MF Advisors !), hence MF Advisors
    can very much charge fees to their clients (it is Clients that
    they decide what & how much to pay to their Advisors), SEBI can’t
    enforce on its own. Let SEBI remain aware of that Clients does
    require Advisors (it could be MF Advisors or RIA) and SEBI’s role
    would be to regulate the total affairs including disclosure level.

    Some of the wording of this draft are okay, however I do not agree
    with the Full draft which require lot of changes.

    Sunil Kapadia (Pune)
    CPFA, MBA (Finance)

  8. Manoj Kumar Gupta says:

    Great Sadique, Good articulation of circular . It will help to grow to both RIA and MF distributes and also help to grow MF business further in country like INDIA where financial literacy of far blow as expected .

  9. Yogesh Thakur says:

    Thanks for drafting this letter. So far, the mutual fund industry has grown mainly on the back of efforts by distributors. Now SEBI is treating them like second citizens. Seems unfair to those distributors who have been sincerely providing service to clients as per their requirements. There is definitely a role that such distributors can continue to play in future.

    In addition to the above points, please consider adding this :
    The implementation of the new rules should also be done with some kind of supervision. The recent disclosure of commission in eCAS statements shows the Total Expense Ratio in Direct plans as “0”, which is TOTALLY UNTRUE. Such false information makes it even more difficult for distributors. The whole vibe with which SEBI has handled this issue is of assuming that distributors are generally dishonest. Whereas, commissions in other industries are much higher (for e.g. 10% in FMCG food products distribution, 2% in real estate). For these industries, there is no regulation. In fact, SEBI has not even touched insurance distributors because of IRDA. So the motto seems to be, catch the weakest guys and bully the hell out of them and leave the stronger guys who are well represented.

  10. Need of Both – Fee-based Advisors & Commission-based Distributors.
    One could do this alone both. And our retail consumer not as much aware
    about technicality of products nor in technology side.

    Yeh off-course our consumer still think product pushing is financial planning
    and they not comfortable with paying a fee for a adviser’s service.

  11. Jitesh Babel says:

    Only becoming RIA is a unviable option for starters taking up this profession. Tell me out of 500 RIA at present how many does not have another company or relative having distribution license. Mutual funds like any push product can be successful only when there is sufficient income incentive to the distributor.

    Why not scrap excess 1 to 1.5% payable on mutual funds distribution in B15 cities. You would argue that this is one time. Give me a break! Any mildly intelligent broker or distributor will make people churn portfolios by showing gains over 2-3 year period and keep on pocketing this extra.

    Brokerages have to be aligned in a way that the distributors doing good and building clients AUM are sufficiently incentivized to continue doing good work.

    Don’t know how the income disclosure and RIA rules will lead to investor wealth being created rather than just make the client look into only at the cost part rather than results and investment horizons.

  12. Nikhil girme says:

    Excellent representation of facts and possible solution…

  13. Vivek Pai says:

    Dear Sadique :
    Your comment :”However, if we are aiming for financial inclusion wherein even small retail investors & uninformed investors are participating and benefitting from the capital markets, there is a clear need for commission-based distributors.”

    My response to this statement is that infact it is exactly the opposite. Fiduciary standards are mandated even more when the client is NOT knowledgeable. The argument that is being made seems to be only from the view of the business viability of a MFD/RIA and not from the Fiduciary stand point. Let the market place evolve for a judicious workable RIA business model while we stick to a Fiduciary standard for ALL advice.

    My other comment is I did not see any reference to products from other regulatory domains being discussed and the regulatory arbitrage that exists with ULIPs/Endowments/Whole Life policies which fall under IRDA and are commission based products. Can these be sold by RIAs for a commission ? – if so it is a gross violation of the fiduciary ethic since commissions in these products will colour the thinking of the RIA. RIAs should be banned from collecting commissions on ALL products irrespective of the regulatory domain the product falls under. kinds of commission

  14. Santosh Niwate says:

    I dont believe SEBI as regulatory. Instead of making MF industry grow they are killing it.

    I failed to understand what sort of people are making such regulations? Instead of taking holistic approach they are treating it with hammer.

    Anyway, I really appreciated your papers and approach. Some of the suggestions are just brilliant.

    Great !

  15. venkatraman says:

    It is well prepared reply to SEBI. If mf is not attractive for IFA ,they go back to Insurance industry where the policyholders are the victim. Please do not push them to sell Insurance.

  16. Prem Batreja says:

    It is an excellent representation. I also suggest .that increase in fees by FPSB from Rs 6000/year to Rs 10000/ year is not justified. Threre is apparently no benefits to CFP. They are not anyway benefited by using CFF ^CM logo.
    Net work should take up matter with FPSB as there is tremendous increase in no of CFP’s passing each day.

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