The Securities and Exchange Board of India (Sebi) on August 25, 2023 proposed introducing a new mechanism for the collection of fees for investment advisors (IAs) and research analysts (RAs).
In this proposed system, all payments made by clients will be processed through a designated platform, monitored by a Sebi-recognised body. With this, Sebi aims to prevent unregistered IAs and RAs from misleading investors.
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This move is part of a larger initiative to establish a closed ecosystem for fee collection by registered IAs and RAs, which would serve two purposes.
First, it would empower investors to ensure that their payments are reaching only registered IAs and RAs; and second, it would help investors identify un-registered entities who cannot access this enclosed system.
The new system is designed to facilitate payments through various online modes, including payment links, as well as methods such as NEFT, RTGS, IMPS, and cheques, via a virtual account number. Once the payment reaches the unified platform, the supervisory body will then transfer the collected fee to the designated account of the respective IA or RA.
Sebi’s existing regulations mandate that fees paid to registered investment advisors (RIAs) should be traceable, and so, cash payments are disallowed. However, over time, numerous unregistered entities have deceived investors, violating IA and RA regulations. So a proactive approach is necessary to curb their proliferation, Sebi said.
Payment of fees to IAs and RAs through the proposed mechanism shall also provide clarity to investors regarding the registration status of the entity. It will also instill confidence among investors that fees are being paid to a Sebi-registered IA/RA and so, will motivate them to approach only registered IAs/RAs for all their investment advisory/research service needs, Sebi further said.
How It Will Work: IAs and RAs will furnish details of their designated bank accounts to receive fees through this system, ensuring these accounts are solely utilised for the collection of fees related to investment advisory and research activities.
The specifics of this fee collection process will be disclosed by IAs and RAs to their clients and will be integrated into client agreements, if applicable, along with a disclosure of the risks associated with making payments outside this proposed mechanism.
Over time, RIAs in India have witnessed the evolution of a fee structure. At present, only RIAs can advise on direct plans and charge clients.
Sebi currently recognises two fee types for RIAs: flat fees, capped at Rs. 1.25 lakh annually, or a fee up to 2.5 per cent of assets under advice yearly. This also marks a shift from commission-centred approaches that prioritised agents’ earnings over investor returns.
Sebi’s 2013 introduction of advisor regulations aimed to eradicate commission-based mis-selling, thus promoting an unbiased fee-based model.
