Sebi investment adviser norms give more control to clients, or do they?

By Rajmohan Krishnan

Markets regulator Sebi recently announced fresh guidelines for registered investment advisers (RIAs) and their roles. As per the new norms, an RIA firm or entity can either provide financial advisory services or distribute financial products to clients, but not do both. In essence, RIAs can run advisory businesses and charge fees for their services to customers, or can distribute financial products such as mutual funds and earn via commissions.

The intention is a strict either-or situation to avoid conflict of interest. While some investment advisers followed the spirit of the above regulations by clearly disclosing that they shall not earn income from products, others followed a more ambiguous practice of being part-adviser and part-distributor of products to the same client through different legal entities.


The new rules issued by Sebi are directed at this practice. There have been long-standing financial advisory entities in the market that have already adhered to such practices by default. Certain select firms consulting HNI and UHNI individuals and families have always adopted a client-centric approach with a no-commissions policy in place even before these regulations were spelt out.

The new Sebi norms are, thus, a validation for true-breed investment advisory firms that have been following client-centric models since the very beginning.

Legitimizing the true-breed investing advisory firms
In any business or profession, a consultant or an adviser derives income from a client, and his/her interest is thus aligned to the person they serve. The norms also aid in the forming of a long-term relationship where clients can measure the benefit derived from the advice given to them and for which fees is paid.

Such fiduciary relationships form the bedrock of financial services and distinguish true breed investment advisors from the rest. If one entity of a financial services is an investment adviser to a client while another entity is distributing products to the same client, there is a chance that the advice could be fraught with inherent conflicts.

For example, in-house products may not go through the desired level of scrutiny, as they have been developed by a group entity-which may create a situation for sub-optimal products becoming part of the client portfolio.

Hence, the new Sebi norms restrict such investment advisory entities from such practices and affirm the fact that authentic advisors/consultant’s function should work on a client-centric model with their fee strictly linked to the assets that are under their administration.

The regulation is also designed to hand over more control to the client by promoting transparency. With a clear distinction between financial distribution services and advisory services, a client can now choose an entity for long-term advice that is customised to his/her financial needs and engage without worrying about potential conflicts of interest. It also elevates the quality of financial advice in the country and allows the client to finally decide between a distributor or an investment advisor.

The client, thus, becomes the final judge and hence this is a very customer-centric initiative by the regulator.

(Rajmohan Krishnan is Principal Founder & MD of Entrust Family Office. Views are his own)