- Meaning of a Registered Investment Advisor (RIA)?
- Understanding RIA in detail
- Who needs to register as an Investment Advisor?
- SEBI regulations for a Registered Investment Adviser RIA
- Ongoing obligations of a SEBI registered investment adviser
- Competitors of Registered Investment Advisers RIAs in India
Meaning of a Registered Investment Advisor (RIA)?
Registered Investment Advisor (RIA) is a person or an organization who gives investment advice to individuals. RIAs have a fiduciary duty towards their clients to give financial advice in the best interest of their clients. RIAs are registered with Securities and Exchange Board of India (SEBI), a market regulator. They have more obligations towards their customers than mutual fund distributors.
RIAs prepare a financial plan for their investors, taking into consideration their goals, finances and their current situation. They also charge a fee for their services. It is usually a flat fee for the financial plan and an ongoing fee for the service they provide. Following are the two types of fees collected by RIAs:
- Percentage of assets: This is similar to trail commission on mutual funds. However, the only difference is that this fee is collected directly from the client and not the fund house. The fees depend on the size of the assets. It is usually 1% of the assets, and as the asset base increases, the fee comes down.
- Flat fee: This is a fixed fee charged by the advisor on an annual basis. It is fixed by the mutual consent of the investor and advisor.
Understanding RIA in detail
In India, the Securities and Exchange Board of India (SEBI) is a financial services regulator and market regulator. Therefore, investment advisors who are registered with SEBI can only provide financial advice to investors and clients with respect to various financial products. However, the advisors have to abide by the RIA regulations.
SEBI mandates that the registered investment advisers must always unconditionally put the interest of the client ahead of their own interest. Also, Irrespective of circumstances the investment adviser has to abide by their duty.
Additionally, Registered Investment Advisers RIAs should report potential conflicts of interest to their clients. It is essential for them to behave ethically in all their business dealings. Furthermore, some RIAs charge their clients some percentage of their assets under management as a fee. At the same time, others charge a flat fee or hourly fee for advice.
SEBI RIA plays multiple roles, including financial planner, portfolio manager, and also tax savings advisor. Effective tax planning will ultimately help in income tax filing, and also some investments help in lowering the tax liability. One can claim these while filing income tax returns.
Who needs to register as an Investment Advisor?
Any person or firm or group of persons, engaged or willing to engage in a business that provides investment advice to anyone for consideration is required to register as an investment advisor. Any individual, sole proprietor, partnership firm, company or body corporate can apply to be a Registered Investment Advisor (RIA) in India. Also, if the number of clients exceeds 150 members, then it is mandatory for an advisor to register with SEBI. However, the following are exempted from SEBI registration:
- Insurance agents or brokers registered with IRDAI
- Pension advisors registered with PFRDA
- Mutual fund distributors registered with AMFI who can provide basic advice to clients incidental to distribution activity
- Members of Institute of Company Secretaries of India, Institute of Cost and Works Accountants of India, and Institute of Chartered Accountants of India who can provide advice to clients incidental to their services.
SEBI regulations for a Registered Investment Adviser RIA
SEBI Investment Advisors Regulation, 2013 regulates investment advisors in India. Also, SEBI prescribes the registration terms, qualification, eligibility criteria, fees to charge from the client, agreement with the client, and implementation services. SEBI has been amending the rules for Registered Investment Advisers RIAs from time to time to enhance investor confidence and increase transparency in investment advisory services. Following are the regulations for an RIA.
For individual RIAs, partnership firms, companies and LLPs to be eligible to be an investment advisor, they need to meet the net worth requirements. The net worth requirements have been recently amended by SEBI in July 2020 and are effective from October 1st, 2020. Also, all the investment advisors should fulfil the criteria within three years.
For an individual, the net worth requirement is INR 5 lakhs. Before the amendment, the net worth requirements were INR 1 lakh.
A partnership firm has a net worth requirement of INR 50 lakhs. Prior to the amendment, the net worth requirements were INR 1 lakh.
For companies, body corporate and LLPs, the net worth requirement is INR 50 lakhs. Before the amendment, it was INR 25 lakhs.
To be a registered advisor, one needs to have the following qualifications:
Professional qualification or postgraduate degree or postgraduate diploma in finance, business management, banking, capital market, accountancy, commerce, economics, or insurance with five years of experience.
Have a NISM level 2 certification.
Prior to amendment in July 2020, a person would need professional qualification or postgraduate degree or a graduate in any discipline with five years of experience.
Registration as an Investment Advisor
To register as a SEBI RIA, one has to apply to SEBI through Form A (https://www.sebi.gov.in/sebi_data/attachdocs/1358779330956.pdf). Along with Form A, one will need to attach the following documents.
- Proof of identity, address and qualification
- Experience certificates
- CIBIL Score
- Net worth certificate from Chartered Accountants
- Past three years income tax returns
- Application fee
- Any other declaration as required
For registration as an investment advisor as an individual or partnership firm, one has to pay fees of INR 5,000 for application. Others have to pay fees of INR 25,000. Post this, a registration fee also has to be paid.
Agreements between clients and RIA
To maintain transparency, SEBI registered investment advisors have an agreement regarding the investment advisory services. SEBI does not specify the format of the agreement; however, the terms, guidelines and conditions are specified.
Fees to be charged from clients
To ensure that SEBI registered investment advisors are collecting reasonable fees, SEBI has prescribed a mechanism of charging fees. Prior to amendments, SEBI didn’t regulate the fee structure. The two proposals for fee structure are:
A fee of 2.5% of Assets under Advice (AUA) per annum per family
A fee of INR 75,000 per annum per family
Ongoing obligations of a SEBI registered investment adviser
Becoming a SEBI registered investment adviser is beyond registering for certification. RIAs must follow certain procedures and practices while providing advice to their clients. It involves identifying any possible conflicts of interest with a transaction, or threats and ensuring that the client understands and recognizes them.
Also, when a client questions about the suitability of an investment, the RIA has to explain the process of selection. The process of identifying the asset, risk mitigating strategies undertaken and prove the suitability of the asset.
From the regulator’s perspective, filing paperwork is essential. For instance, if an investor is under investigation of the SEBI, they require the full documentation of the investment approach. It also requires customer documentation showing the knowledge of the client’s investment profile and risk tolerance.
Competitors of Registered Investment Advisers RIAs in India
There are different categories of advisors that perform and practice advising in different ways. Following are the groups or individual advisors who are a direct competition to RIAs.
- Mutual fund houses
- Hedge funds
- Wirehouse firms (investment banks) – through wrap programs for individual brokers
- Online or discount brokers who cater to do-it-yourself (DIY) investors
- Robo advisors