It has been a decade since SEBI came out with investment advisory regulations in 2013 separating distribution and investment advice to protect the interest of investors. As per the regulation, investment advice means giving advice on investment securities or products or investment portfolio for the benefit of client and shall include financial planning. This includes all products like stocks, mutual funds, ETFs (exchange traded funds), PMS (portfolio management service), etc., which come under the purview of SEBI regulation. So, any individual or corporate providing investment advice on such products need to mandatorily register with SEBI and procure the advisory license, subject to certain criteria. If any person or entity is found engaging in providing investment advisory services without getting registered with SEBI, the regulator can take appropriate action against them.
The clear intent of these regulations is two-fold:
- One is to remove conflict of interest in advising on financial products. An Adviser wherever available, will advise on products under direct plans only (non-commission based). Since, the Investment Adviser does not earn any commissions on the products advised, he/she has no vested interest in pushing financial products of only those companies which could earn him/her the highest commissions. The Adviser is not a product seller, but rather a solution provider, based on the needs of the Client.
- Another is to provide unbiased, professional and competent advice to investors. The regulations mandate the Adviser to have a professional qualification or post graduate degree in finance, accountancy or business management, capital markets, banking, insurance, commerce, etc. Further, the Adviser is also required to have minimum 5 years of experience in activities related to advice in financial products or securities or fund or asset or portfolio management.
To sum it up, SEBI has separated the 2 arms of the financial services industry – distribution and investment advisory. In our next post of this 3-part series, I will write about what does a SEBI registered investment adviser do.