The move has sparked widespread concern among advisers, who fear it could signal the end of holistic financial planning and undermine the comprehensiveness of their services.
The challenge
Most people seeking financial guidance turn to an investment adviser for a complete plan that covers everything from mutual funds to tax and estate planning. Now, this comprehensive approach is under threat with Sebi proposing to limiting these services under the investment adviser (IA) licence.
If advisers wished to continue offering such services, they would need to do so through separate legal entities and under different branding.
Regulation overhaul
In a consultation paper, Sebi proposed that investment advisers should no longer offer services like tax planning, estate planning, loan management, real estate, gold, or bitcoin under their IA licence. Sebi’s reasoning: these products are either unregulated or fall outside its jurisdiction, making it difficult to address client complaint related to such offerings.
However, for services or products regulated by other authorities, investment advisers can continue to operate, provided the grievances are handled by the respective regulator.
Also read | How Sebi’s reforms could transform India’s investment advisory landscape
For example, grievances related to fixed deposits are managed by Reserve Bank of India, those related to the National Pension Scheme by the Pension Fund Regulatory and Development Authority, and insurance-related grievances by the Insurance Regulatory and Development Authority.
While Sebi aims to distance itself from unregulated products and those overseen by other authorities, RIAs can continue to offer general asset allocation advice, such as advising clients to allocate a portion of their savings to various asset classes.
However, Sebi does not want them to actively manage these assets or handle tax planning under the IA licence.
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Adviser backlash
When the IA regulations were introduced in 2013, Sebi included “financial planning” as part of investment advice. Consequently, many people opted for the IA licence specifically to offer comprehensive financial planning.
Now, Sebi aims to remove “financial planning” from the scope of the licence directing advisers to focus solely on managing regulated assets.
“We provide what our clients want and they expect us to provide 360-degree financial plan,” Renu Maheshwari, a registered investment adviser and vice chair of the Association of Registered Investment Advisers (ARIA), said.
If an investment adviser only focuses on specific products without considering the entire financial picture, it amounts to just selling a product, she said. “Investment advisory is a part of financial planning and Sebi is looking the other way around.”
A financial plan typically considers a client’s income, debt, homeownership, tax liability, and other factors to determine suitable investments.
“If I don’t advise on insurance products or risk management, while doing investment advisory, then I would miss out on what other risks a client is taking,” added Maheshwari. “The regulator is looking at a jurisdiction-centric approach, while we are looking at a client-centric solution.”
The textbook definition of financial planning comprises various aspects of a person’s financial life, such as education funding, insurance, taxes, and estate planning. Additionally, most investment advisers provide advice on international stocks or employee stock options in global companies.
However, Sebi’s consultation paper proposes to exclude such assets from the investment advisers’ scope, as they are either unregulated or overseen by foreign regulators.
Suresh Sadagopan, an investment adviser and founder of Ladder7 Financial Advisories, argued that creating a financial plan for an individual using separate entities would be overly cumbersome. “It will become a hassle and not possible to create multiple entities to cater to the needs of a single client.”
Harsh Roongta, an RIA and founder of Fee-Only Investment Advisors, stated that Sebi’s concern about complaints related to unregulated products and those overseen by other entities is disproportionate.
Also read | How Sebi is cracking down on unregistered investment advisers
According to data compiled by the Association of Registered Investment Advisors (ARIA), 73% of the complaints received by Sebi since the introduction of RIA regulations were about trading call providers, and only 1% were related to advisory services. (see infographic)
“I believe futures and options (F&O ) advisory should not be allowed under RIA licence because that’s where most of the complaints are coming from,” added Roongta.
Additionally complaints on unregulated products or those not overseen by the markets regulator are not separately tracked.
Finding a balance
Several registered investment advisers suggested that it would be perhaps be better to provide clear disclosures to clients that Sebi will not offer recourse for unregulated products, rather than requiring the creation of separate entities for advising on different products or services.
Roongta said that in developed markets such as the US, despite a complicated regulatory environment, there was no such stringent requirement for financial planners.
He also noted that Sebi allows part-time advisers to provide unregulated services with a disclaimer that these activities fall outside Sebi’s regulations.
Interestingly, Sebi has proposed allowing part-time advisers, including those with non-finance backgrounds, to serve up to 75 clients as part of the same consultation paper.
Roongta suggested that full-time RIAs offering financial planning should also be ideally receive the same treatment and Sebi should consider it.
“A client comes to one person to get comprehensive financial advice. If it’s broken up into two separate pieces, the offering would get fractured,” Roongta added. “Managing it through two entities could spell the end of comprehensive financial planning.”
Another possible solution would be for Sebi to white-list certain services, such as tax planning, wills and estate planning, while blacklisting more risky products within financial planning.
Sebi has also collected feedback from RIAs and is expected to revisit its proposals before finalising the regulations.
Advisers expect the markets regulator to address their concerns and that the new rules will better accommodate comprehensive financial planning.
