Stick to Sebi- registered investment advisors

Last week, the Securities and Exchange Board of India (Sebi), as part of its effort to tighten the norms for giving investment advice, warned the public to deal only with Sebi- registered investment advisors ( RIAs) and research analysts. Investors who heed the regulator’s advice are much less likely to fall victim to the twin malaise of poor- quality advice and misselling.

The Sebi ( Investment Advisors) Regulations, issued in January 2013, made it mandatory for any person or entity that acts as an investment advisor to obtain a certificate of registration from the regulator.

The first advantage of dealing with an RIA is that he would be properly vetted. He would have cleared the NISM Series- X- A and B exams. To obtain the certificate, he would have demonstrated that he possesses the required qualifications, infrastructure and capital.

An inherent conflict of interest arises when people who offer investment advice also sell products. They inevitably veer towards selling products on which they can earn a higher commission, rather than those that are in the client’s best interest.

The Sebi ( Investment Advisors) Regulations states explicitly that the advisor shall receive remuneration only for advice. He shall not receive any other form of compensation for the underlying products or securities for which advice is provided. If he engages in selling of products, he must segregate those activities from his advisory services. If the RIA, or any entity related to him, receives remuneration for the product sold to the client, this information must be revealed to the latter.

“Since the Sebi RIA is not into product pushing, the advice that the client gets is conflict- free,” says Ankur Kapur, founder, Ankur Kapur Advisory, a Sebi- registered investment advisor.

The intent of these regulations is that the RIA should have afiduciary relationship with his client. “ The RIA should advise the investor in the manner of a trustee,” says Anil Rego, chief executive officer and founder, Right Horizons, a Sebi- registered RIA.

The regulations require RIAs to carry out risk profiling of clients and suggest products appropriate to their risk- bearing ability. They are also obliged to maintain extensive records of their dealings with clients, including the advice given, for five years. In case of a complaint, the regulator can have these records examined and hold the advisor accountable. On account of the norms that a Sebi RIA must adhere to, the advice a client receives is likely to be of a higher quality.

“Professionalism and transparency are the essence of these regulations,” says Rego.

RIAs, however, emphasise that client mind- sets, too, need to evolve. “ Clients should be willing to pay the RIA’s fee. At present, there is marked reluctance on this count, even though the younger generation understands the benefits of dealing with RIAs better,” says Kapur. He suggests investors get their advice from RIAs and use the low- cost platforms that have come up to invest in mutual funds.

The Sebi ( Research Analysts) Regulations 2014 similarly places a number of obligations on the registered analyst, so that he issues reports not influenced either by the company being analysed or by his employer’s investment banking interests. Says Ambareesh Baliga, a Sebi- registered research analyst: “ Our transactions are also regulated, removing the scope for frontrunning.

We can’t buy a stock 30 days prior to the publication of a research report on it or till five days after.” To check whether the person you are dealing with is a Sebi- registered advisor or analyst, visit the regulator’s web site where the complete list of registered entities is provided.

Business Standard New Delhi,14th June 2016

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