India needs more investment advisors, research analysts

The Sebi’s consultation paper proposed relaxation criteria for IAs and RAs over their qualification, certification, experience and net worth requirements

Just last week, Sebi (Securities Exchange Board of India) issued a consultation paper on RA/IA (Research Analyst / Investment Advisor). The paper has come up with some interesting pointers eliciting opinion from the professionals and public on the changes that were proposed in the regulation of the RA and IA. Since the initial regulations were launched in 2013 and 2014 respectively for IA and RA, there have been amendments to the law.

The regulator has been on a trial-error method, issuing regulations and then sensing the feedback, again tweaking the laws and checking for the response. The root of the regulation is to bring standardisation, accountability and compliance on the part of the practitioners while enabling better service to the customers. However, the compliance burden has given away the initial enthusiasm among the practitioners amply reflected in the dwindling number of registered individuals and entities. The IA community has shrunk to under thousand with a sizable number among them remaining dormant.

Likewise, the RA registrations are hovering over 1300 of which again if the dormant participants are to be removed brings down to lower than a thousand. This is when the broader participation in the financial markets has taken an upward curve particularly post pandemic in India. The buoyancy is reflected in the monthly addition of new mutual fund (MF) investors and the new demat account holders along with the increased flows into the capital markets.

This puts the advisor/analyst to the investor ratio at a very abysmal level. This disparity is one of the leading causes of proliferation of unregistered entities acting as IAs and RAs. To cater to the needs of large number of investors in the country and the potential for growth in wealth creation for investors, a much larger number of IAs and RAs is required.

The paper proposed relaxation criteria for IAs and RAs over their qualification, certification, experience and networth requirements. In a bid to attract young minds towards the profession of IAs/RAs and to enable ease of entry for persons intending to provide investment advice/research services within the ambit of SEBI, it is proposed to relax the existing minimum qualification requirements from a post- graduation to a graduation degree. Also, the current norm of renewal of the IA through repetition of exam (NISM XA and XB certification) has been a source of worry upon business continuity. It’s now proposed that only at the time of initial registration as IA/RA the certification needs to be obtained and thereafter certification shall be based on the incremental changes or developments during the previous period.

Most crucially, the requirement of experience for registration of IA/RA has been removed from the current 5 years of relevant experience making it par with that of the other SEBI regulations like MF and AIF. The networth requirements were completely removed from the current Rs5 lakh and Rs50 lakh respectively for individuals and non-individuals. Instead, an amount of deposit to be maintained by IA/RA of Rs1lkah for up to 150 clients, there on up to 300 clients a sum of Rs2 lakh, up to 1,000 clients at Rs5 lakh and Rs10lakh over 1,000 clients.

Also, the paper proposes for allowing a combined registration of IA and RA registration with clear segregation of both the investment advisory and research services. Another important proposal is introducing part-time IA/RA for individuals and partnership firms who’re engaged in other business activity/employment (other than related to securities) which doesn’t involve handling or managing money or funds and unrelated to advice/recommendation of any product/assets for investment.

However, individuals or firms engaged in financial sector regulator or under the purview of self-regulatory organisation could be eligible for part-time IA/RA i.e., CAs and insurance agents. The paper also came up with pointers on the technological advancements happening in the field like usage of AI tools. As IAs/RAs who use AI tools for servicing their clients must provide complete disclosure of the extent of use of such tools to their prospective clients to enable to make informed decisions of continuation or otherwise with the IA/RA.

Most importantly, flexibility for IAs to change the mode of fee collection has been proposed. From the earlier rigid parameter of either 2.5 per cent of AUA (Assets under advisory) or Rs1.25 lakh per annum per family, the IAs are now allowed to in any mode but with the thresholds same and the AUA is only to the extent of the purview of SEBI regulated securities.

(The author is a partner with “Wealocity Analytics”, a SEBI registered Research Analyst firm (Reg no.INH000017213) and could be reached at knk@wealocity.