A write-up by Sumit Duseja (co-founder and CEO, Truemind Capital) in LiveMint.
Sebi introduced Registered Investment Adviser(RIA) as a category of intermediaries in 2013 to safeguard the interests of investors. RIAs are competent professionals offering unbiased and optimum investment advice to their clients. Nearly a decade thereafter of changes in regulations, challenges still prevail on the awareness of the benefits of hiring an RIA, limiting the growth of the profession.
But what led Sebi to introduce the regulations for investment advisory? Wealth management is a noble career path. A wealth manager or an investment consultant helps you preserve or grow your wealth to achieve life goals. With professional advice, one can better navigate the complexities of the lifelong financial planning process. It therefore entails a high responsibility for decision-making, directly affecting the clients’ lives.
Unfortunately, the incentive structure based on commissions in established wealth management set-ups has compromised fiduciary responsibilities towards an investor. In simple terms, the products that offer higher commissions to the distributors/agents in most cases are not appropriate for investors. The net returns on investments are after deducting the commission component. Products with higher commissions usually translate to lower net returns in the hands of investors. The interests of an agent/distributor are not technically aligned with that of investors. This results in the mis-selling of unsuitable/less suitable products, affecting finances and the quality of life of people.
To address the problem of inappropriate recommendations, Sebi introduced the RIA regulations. RIAs cannot drive any direct or indirect benefits from the product manufacturers. Their only source of revenue is the fees received directly from their clients. RIAs are also subjected to higher qualifications, minimum relevant experience, repeated certifications, infrastructure requirements, accountability regarding the suitability of advice, and adherence to other Sebi compliances. This results in higher transparency, reliability, answerability, and better value addition.
Since the RIAs don’t earn from commissions, they must recommend only zero-commission options wherever available, like zero-commission direct plans of mutual funds (MFs). Recommendations are generally customized and, together with the saved commissions, can increase the net investment gains. RIAs continue to earn fee income until they continue to deliver value to the customers. Consequently, the process aligns the interests of both parties in a conflict-free manner.
Despite the introduction of direct plans of MFs and the RIA category way back in 2013, there needs to be more awareness about this even today.
As per a report from the Association of Mutual Funds in India in March, direct plan investments amount to only 23% of individual assets in MFs and the rest is still in regular plans.
We did a survey on LinkedIn and asked “Why do you not invest in direct plans of MFs?” to which 35% said they were not aware of it and 65% said they would not get advisory support.
The result is not very surprising since no media efforts were ever made to make clients apprised of the benefits of hiring an RIA. This is despite market regulator Sebi cautioning the common public against unregistered investment advisers. The well-funded established players prefer to run traditional commission-based businesses, which are easier to manage with lesser compliance. Therefore, no efforts are being made by them on a larger scale to promote fee-based advisory services.
The difficulty in running the RIA practice due to lack of awareness and high regulatory compliance costs is reflected in the low number of active RIAs even after a decade of introducing this category.
The fee-based advisory is very much prevalent in Western countries. If any indication can be drawn from the actions of the Indian regulators over the past decade, the fee-based advisory will eventually become bigger and will be easily accessible to the majority of investors. However, for that to happen sooner, there is a need to create awareness that will translate to demand for fee-based advisers. Higher demand will attract more quality people to this profession and speed up the movement from commission-based distribution to fee-based advisory practices.
Now the question is, who will create awareness about RIAs? Does it become incumbent on roughly 1,300 RIAs, of which only 400-600 are active? Sebi needs to establish some mechanism to dispel the knowledge at a larger scale. In this way, the burden of compliance on RIAs will become more bearable, and this will help flourish the profession that can uplift the quality of lives of people with access to unbiased and professional financial advisory.
Originally posted on Livemint: www.livemint.com
Truemind Capital is a SEBI Registered Investment Management & Personal Finance Advisory platform. You can write to us at connect@truemindcapital.com or call us at 9999505324.
