SEBI cracks whip on people giving financial advice
Without much fanfare, a revolution is taking place in the financial industry. SEBI has come down hard on people giving financial advice.
Until now, anyone could call himself a financial advisor. Often, this meant that people selling insurance policies or mutual funds could say they were giving financial advice, when they were quietly pushing their products and getting commission from the companies.
The government’s financial regulator—Securities and Exchange Bureau of India—has now brought a rule that there can be only two types of people in the financial advice business: those who give advice and charge a fee for it and those who sell products and get a commission from the sale.
Doctors and lawyers give advice and charge a fee, but they don’t sell products. That’s what investment advisers will be hereafter.
Once the doctor gives you a prescription, you go to a pharmacist who sells you the medicines and gets a commission for it. That will be the other type of person in the financial industry—those who sell, say, a mutual fund or an insurance policy. They get a commission from the companies for selling the products. These people cannot give financial advice to clients because of conflict of interest. Also, they cannot call themselves financial advisors.
Abroad, there are laws in this regard. Some countries, notably the U.K. and Australia, have banned commissions altogether. In those countries, people selling insurance or mutual funds will not get a commission. Instead, they have to collect a fee directly from the clients.
What does the new regulation mean for India? One, it will pave way for more transparency. Two, it will drastically reduce mis-selling of products.
We foresaw such a move a long time ago. So, in 2011, we started an online platform called myassetsconsolidation.com. It was the first of its kind in India. In this company, we advise clients and collect a fee for any query on personal finance. We also disclose our fees upfront. And we get into a clear agreement with the client so that there is no misunderstanding and the advice is meaningful and relevant.
When we started myassetsconsolidation.com, we were clear about one thing: a person who buys financial products from an agent or consultant is the boss. The client should decide what to pay for the service he or she gets from the agent or consultant.
So, when the new regulation came in October, we immediately applied for registration with SEBI and got it.
But many individual consultants could not make up their mind or lacked the qualification. Even many wealth management consultants were afraid of the new regulations and did not apply for certification.
We have been very clear all along on separating financial advice from selling products. In the past six years, I wrote articles in favour of such an idea. When I was then with The Hindu Business Line, I wrote even an editorial page article pointing out the gaps in the regulation that was being discussed by SEBI. I am glad that SEBI has introduced this regulation separating financial advice from the sale of financial products.
Can anyone open an office and put up a board calling himself/herself a financial advisor, even if he/she collects only a fee? No!
To become a financial advisor, SEBI insisted on intensive and extensive training and rigorous testing.
On top of it, to become a Registered Investment Advisor is a long and tough process.
In all of Tamil Nadu, only three persons – yes, only three — have got this license. I am happy to inform you that I am one of them!
What’s the advantage of being an RIA or Registered Investment Advisor?
- RIAs are monitored by SEBI and are subject to its guidelines.
- RIAs need to file their advisory process with SEBI to get approval. To give advice, the RIA has to follow a process—drawing up a risk profile of the clients, evaluating their needs and recommending suitable ways to reach their goals.
- Every year, the RIAs are audited by SEBI. A Chartered Accountant has to certify that the RIA followed the process set by SEBI.
- RIAs also have to maintain records for five years of the advice given to clients. And these can be audited any time.
In Tamil Nadu, I am the first male to get the SEBI license to practice as a financial advisor—that is, give advice for a fee and get absolutely no commission from any company selling a product. In all of India, only 76 people have got the certification.
Now, what is going to happen in the financial world?
I believe that this concept of Registered Investment Advisers will catch up in the years to come. And with SEBI insisting on better training and higher qualifications of advisors, and with audit of the services, the financial industry will move away from selling products to providing high-quality impartial advice.
You will also be happy to know that you are already getting such process-driven advice from myassetsconsolidation.com.
I look forward to raising the bar and providing even better service.