What are the challenges of being a Registered Investment Advisor (RIA)?
Fee-Only Investment Advisor or Registered Investment Advisor (RIA)
As per the SEBI Investment Advisers Regulations 2013, an Investment Advisor shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interest as and when they arise.
(Ref: www.sebi.gov.in SEBI (Investment Advisers) Regulations 2013)
The Investment Advisor needs to be registered with SEBI under the above regulations. SEBI also stipulates that all Investment Advisors need to be professionally qualified by taking the NISM conducted Investment Adviser X-A Level 1 and Investment Adviser X-B Level 2 Exams. These are compulsory exams to qualify as Registered Investment Advisors (RIA) with SEBI.
The fee only advisor should not have any leanings towards any company. He should only have the client’s best interests and financial needs and profile in mind, while choosing suitable products. For the fee-only advisor the product comes at the end, the recommendations are person based instead of product based. As opposed to fee-based or commission-based advisors who can also accept commissions from the companies, the fee-only advisor must adhere to certain criteria at all times. He or she will not receive any consideration or compensation in any form for the products for which he or she provides advisory services.
What are the challenges of being a fee-only advisor? How would one position oneself?
The first step would be diverse oneself totally from the products. Products are limiting if one is exclusively trying to sell only a few. Some steps that would help an Advisor to position himself better are:
Financial Planning should not be a one-off process. The finances or investments need to be reviewed at least on a quarterly basis. So often one gives investment advise and expects the client to follow it to letter for at least a couple of years. In the meantime brokers or commission based advisors aggressively market certain products and sway the clients, making the entire financial planning process go awry. A regular approach, professionally, with reminders to the clients about their impending visit, could solve many issues.
A regular approach also serves another purpose. It educates the client on finances and need for planning, as well as gives them realistic expectations from their investments.
There is a debate going on currently in India whether Investment Advisors should be fee– only and not be Distributors in any form, because of the obvious conflicts of interest. The move towards fee –only looks imminent. A new draft regulation in the offing plans to do away with SIDD (Separately Identifiable Division or Department) through which an investment advisor could distribute investment products or execute transactions. Neither the advisor nor his immediate relatives will then be able to be brokers of investment products or transactions, if this happens.
Technology for Fee-only Advisors
If the draft regulation is put into effect, the change will see a massive re-modelling of the investment advisory sector. A new breed of professionals will emerge who will reach out to the clients in new innovative ways. Technology is likely to play a major role in this transition. Quality of advice will vary depending on the fees charged, from utilitarian to premium.
A major issue that is likely to crop up is the quantum of fees. As there are no stipulations on the same as of now, it will take some time before Investment Advisors are able to settle on the appropriate fees that will suit their target market.
After years of being at the receiving end of high fees based products, investors are wary of accepting any recommendation from traditional brokers. With the plethora of literature available, they are more aware and look for professional guidance. This is where the upcoming regulations and the new era investment advisors will make a difference. At present, of the list of registered Investment Advisors, only a very few are exclusively fee – only.
The disruption likely to happen in the Investment Advisory sector makes it exciting times ahead for the clients, who will be the ultimate beneficiaries.
(article by Ms. Sanghamitra Rath)