Where are India’s missing investment advisers?

Take for instance the case of this Mumbai-based RIA. After almost 30 years of working in various roles in the financial services and advisory industry, he was in for a rude shock when the new regulations mandated him to get a postgraduate degree. He had obtained his RIA licence in 2019, but the very next year Sebi mandated all RIAs below the age of 50 years to get a postgraduate degree or a diploma or CFA charter within three years.

He was 47 years old at the time and recounts that the compliance requirement felt bizarre. “How will postgraduation enable me to offer better advice when I have done so for 30 years without a master’s degree. Think of a graduate adviser with 15 years of work experience vis-a-vis a fresh postgraduate with just three years of work experience providing advice. The latter would not have seen even a single market cycle," said the adviser who did not want to be named.

He did enrol for postgraduate studies but practical challenges did not allow him to complete the course. “To manage your business, family and other obligations, along with studies, was too taxing," he said. This, along with some other compliance mandates, pushed him to surrender his licence in 2021.

In another case, a Mumbai-based corporate RIA, who did not want to be identified, submitted his application to surrender the licence in April after active practice of about six years. “Every month, a new regulation comes in and that forces you to completely change your business processes. It has come to a point where you are just running around figuring out what is the next compliance headache," said the adviser.

 

These are not standalone cases. More and more RIAs are giving up their licences ever since the Sebi reglulations. In 2020, Sebi introduced the flat fee model, tightened the qualification standards for RIAs and client-facing employees being hired by corporate RIAs, mandated a corporate licence beyond 150 clients, increased net-worth requirements and broadened the scope of annual audit.

Compliance burden

Most RIAs say the new regulations entail cumbersome processes and so have increased the compliance burden (see graphic). The co-founder of a tech-based corporate RIA said his firm had written to Sebi, seeking to surrender its RIA licence. “Most of my time is spent worrying whether I have missed a compliance requirement. Earlier, the SI portal (Sebi intermediary) made the work easier as Sebi would assign you tasks and you had to complete them. Now, we have moved to a regressive practice of emailing to BASL (BSE Administration and Supervision Ltd), a supervisory body, which never acknowledges receipt of the audit," he told Mint. He, too, did not want to be identified.

Among the various compliances that they have to meet, RIAs have to record and store every communication, irrespective of whether it’s done over a phone call, Whatsapp, email or in-person meeting, with an existing or a prospective client. These can only be stored with a storage provider that follows India’s data protection law, so the RIA has to get a certificate from the service provider confirming the same and submit it to the auditor.

Another major pain point is the lengthy agreement that clients have to sign. From an ease of doing business point of view, it is a cumbersome process. Even a small change in the investor’s risk profile will require the agreement to be signed again.

But Sebi’s rationale for these stringent regulations is to curb the malpractices of stock tippers masquerading as RIAs. “Look at these regulations from an investor’s point of view. It sets higher standards for entry of RIAs, gives them a good reputation and will ensure only the best advice reaches investors," said Nitin Mathur, co-founder and CEO, Tavaga, a Sebi-registered RIA.

That said, the trend of RIAs surrendering their licence is concerning as their number is already quite low, at 1,325, as on 15 May. Only 886 of them have registered with BASL. Further, as per industry players, the number of those practising under active financial planning model with clients is only 200-250, while the others are either running smallcases or are just not active.

Other constraints

RIAs provide unbiased investment advice to its clients but cannot sell financial products, unlike distributors and brokers, and hence, can earn only through clients by charging them either a fixed fee capped at ₹1.25 lakh per annum or up to 2.5% of the value of assets under advice (AUA). Also, RIAs cannot execute investments on behalf of their clients, which, coupled with the flat fee structure, ensures that the advice is absolutely conflict-free.

But, an increase in the number of compliances has pushed up the cost of doing business, says a Pune-based investment adviser who declined to be named. This former RIA used to trade a small portion of clients’ portfolio in derivatives on a profit-sharing basis, but Sebi banned such profit sharing models for RIAs. The fixed fee model, he says, was rendered insufficient as compliance costs shot up. “I had about 100 clients but with small-ticket portfolios. A flat fee wouldn’t earn me much and on top of that I had to shell out about ₹30,000 for audit, besides the costs on disclosures, KYC checks, getting the website landing page changed as per Sebi norms and maintaining clients’ communications. These small costs add up over time," he said, adding that he finally decided to stop the practice and surrendered the licence in September 2022.

Other developments, too, had an impact on the revenues of RIAs. Recently, Sebi mandated them to hold cybersecurity training for their clients as well as employees. Such training is usually conducted by a company secretary and can cost ₹40,000-60,000.

The high cost of business has deterred many qualified individuals from entering the space. Shubham Gupta, co-founder and CEO, Growthvine Capital and a CFA charterholder, is a case in point. Gupta had contemplated applying for an RIA licence before becoming a mutual fund distributor. “I am a proponent of conflict-free advice but building an RIA business did not make economic sense to us," he said. “Charging fees from the clients during tough market conditions is a practical problem. They don’t pay the renewal fee, saying the portfolio is down, and demand to know what they are being charging for. ‘Advice’ is considered free in India, so it is difficult to set up an entire business around it."

The co-founder of the tech-based corporate RIA firm quoted above said that both revenue models—a flat fee and a percentage-based charge on AUA—have their limitations. “The flat fee charged to clients never exceeds ₹30,000-50,000 per client because most people will not pay beyond that. One can argue that AUA percentage share model can earn you better as the portfolio grows but in reality a lot of investors invest only a small portion of their portfolio through the RIA. They then replicate the same portfolio on their own to avoid increasing the AUA," he said.

Sebi’s latest advertisement code for RIAs could be the last straw that will break the camel’s back. As per the order, RIAs have to take prior approval from BASL and pay a ₹3,000 fee, in the case of individual RIAs, and ₹6,000 if it concerns corporates, each time a new advertisement has to be put out. Advertisements, as per the order, don’t just refer to marketing content but all types of communication ranging from circulars to newsletters to even any reference to past performance in any communication mode that can influence an investment decision.

Responding to this development, all former RIAs that Mint spoke to unanimously agreed that they do not regret their decision to forfeit their licence.

“It has reached a point where Sebi is not regulating RIAs but is micromanaging every aspect of their business. Such regulations will prompt more RIAs to leave," said the Pune-based investment adviser.

Financial influencers, or finfluencers, are a growing concern, as are distributors and lenders who continue to thrive due to lack of regulations.

“The larger issue facing RIAs is the existence of this alternate model of distribution which continues to render advice (beyond incidental advice) and earn by way of commissions from products they sell. This is the single biggest reason why the number of RIAs is not growing. Why will a distributor take up the RIA license and go through all the compliances," asks Ashish Ketan, founder, Serenity Wealth, a Sebi-registered RIA.

This is the reason for the alternative career paths that wealth managers are charting out. And portfolio management services (PMS) is one of the options.

“Wealth firms are increasingly moving towards setting up ND-PMS (non-discretionary PMS) structure instead of an RIA business. Through ND-PMS, the manager recommends the same funds as an RIA would, but under the PMS model. The other difference is that the PMS manager is bound to execute the transaction under the client’s demat account, while in the RIA model, investors are free to execute the transaction by themselves," said a wealth manager who did not want to be quoted.

Many former RIAs have now taken up different roles in investment advisory, such as creating investments- related content, collaborating with a PMS as a fund manager, corporate trainer and life coach, while some have moved back to distribution.