Published blog Details

Posted by: Uma Shashikant on Mon, Aug 20th, 2012

SEBI (Investment Advisors) Regulations, 2012 - A Review

SEBI (Investment Advisors) Regulations 2012 have been approved by its Board on August 16, 2012. The final notification of the Regulation should provide all the details. But based on the press release from Sebi on the minutes of the meeting the following points emerge:

  1. Anyone who provides investment advice for a consideration will have to register with SEBI as an investment advisor. All providers of fee-based financial planning and advisory services will have to abide by these Regulations.
  2. If the advisor is a bank or body corporate also engaged in distribution, a separately identifiable department or division (SIDD) has to be created for providing advisory services. This enables existing fee-based advisors who earn trail on products recommended by them, to convert themselves to a body corporate and establish a SIDD under the Regulation.
  3. Only financial advice is covered by this regulation. Distribution of products will continue to be regulated by product regulators such as RBI (deposits and loans) SEBI (MF), IRDA (Insurance) and PFRDA (pension products). Since the two activities are segregated, the certification and compliance requirements may not overlap.
  4. An investment advisor cannot receive any compensation or remuneration other than from the client. This means trail income can be earned only by the distributor, or the distinct distribution arm of the investment advisory business, and not by the advisor himself. Such income earned should be disclosed to the investor.
  5. A list of entities is exempt from the Regulation. They need not register themselves as investment advisors or abide by the Regulatory provisions. Apart from chartered accountants, brokers, merchant bankers, portfolio managers, the list of exempt entities includes distributors registered with AMFI "who provide investment advice incidental to their primary activity." This means an existing mutual fund distributor, registered with AMFI, can advise investment into mutual fund products, without attracting the provisions of this Regulation.
  6. The regulations require a set of compliance requirements registered investment advisors. They have to keep records, abide by a code of conduct, undertake fiduciary duties, conduct risk profiling of the clients and also ensure suitability and appropriateness of the advice. The administrative costs of being a registered investment advisor is likely to be high.
  7. The Regulations also prescribe requirements with respect to experience, qualification, certification and net worth/ net assets for a person to act as an investment advisor. These details will be available only when the complete Regulation is notified by Sebi.



What are the likely implications for distributors of mutual fund products? There are three broad categories of players.


First are those who stick to distribution and depend on upfront and trail from mutual funds. This group is untouched by this regulation. They can continue to do what they have always done.


Second is the segment of distributors that has moved from being product sellers for a commission to fee-based advisors seeking a fixed fee from investors. Most of them earn a trail commission on products sold by them before the switch. For many of them, trail is an important source of revenue and very much part of the business plan. They now have to set themselves up as registered companies, and segregate advisory and distribution divisions. They can earn both fees and trail and grow their business.


Third is the segment of a select few who are fee-only advisors with no interest in distribution. They run bouquet advisory business on the strength of fewer large ticket clients. This segment has to register itself as investment advisor, comply with the Regulation and can continue to earn its fee.


The Sebi (Investment Advisory) Regulation 2012 simply recognises a new category of intermediaries and prescribes certification, registration and compliance for them. It does not change the rules of the game for mutual fund distributors in any significant manner.



Shradha Rajpal on Tue, Oct 2nd, 2012 8:32:56 pm

Thanx a lot, very useful article,

Sanjiv Singhal on Fri, Sep 14th, 2012 6:01:42 pm

This should be seen in line with other steps being taken by SEBI - most recent being provision for different classes of units with different expense ratios. It appears that groundwork is being laid to allow for customers to choose different channels with their attendant benefits and costs. Accordingly IFAs will have to choose which model to adopt.

Ajit Purohit on Wed, Aug 29th, 2012 6:21:57 pm

Though the themes are good, there are many unanswered questions, for which the detail guidelines are expected from SEBI.

Uma Shashikant on Sat, Aug 25th, 2012 2:52:15 pm

Dear Mr. Vyas, the regulations have to still be announced. But what the preview in the blog shows is that while IFAs may be able to continue to sell MFs and other products, in order for them to be able to do both advisory and distribution businesses, they may have convert to a registered corporate. That is an advantage banks and institutional advisors already have, it would be easier for them to offer both distribution and advisory to their clients.

s v vyas on Sat, Aug 25th, 2012 12:37:32 pm

Dear Uma ,there is complete diffrence in email hilighted and actual article , in article sebi only clarify stand on advisory business not a matter of Banks and institutional distributors have been favoured over IFAs,

Uma Shashikant on Thu, Aug 23rd, 2012 4:07:11 pm

The IFAs currently operate as sole proprietorships and most as geographically concentrated entities. They earn an upfront commission and trail on the mutual fund products they distribute. The new investment advisor regulations that have been proposed (not yet notified) requires registration as a company, if the intent is to provide both distribution and advisory services. Such company should have a distinct set up for advisory services. This requirement can be readily complied by banks and corporates. But individual advisors will have to consider their options between distribution and advisory and the costs associated with it. There is no need to get alarmist about it, or blame Sebi, as these regulations may bring about much needed clarity on roles advisors like to play.

s parasuraman on Wed, Aug 22nd, 2012 2:09:16 pm

Dear Uma, I saw your mail and the notification.Nowhere,it is mentioned that banks and corporates were preferred over ifas.Don't draw your own conclusions and confuse me.Already,much has been said and done by sebi against the IFA's.

Srinivasan B on Wed, Aug 22nd, 2012 11:02:05 am

Yes - there appears a complete transformation required even to survive. But also a lot of unanswered questions - may have to wait for the detailed guidelines - especially the compliance requirements as well as capital/net worth requirements.

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