Abhishek Anand, Mint, 29/9/2011
Sebi’s draft guidelines on regulation of financial advisors emphasise quality and transparency
Seeking a drug from a chemist may be easy but you can’t be sure whether it will cure the disease you took it for or would not react because of other body symptoms. That’s why it’s better to visit the doctor even if it takes a little more of your effort and time since the doctor will look at your overall health before prescribing any medicine. The same holds true when it comes to a broker and an financial advisor. While a broker may not think twice before selling you an insurance policy or a mutual fund, irrespective of your needs, a financial advisor would look at your overall financial health before recommending a scheme.
Choosing between an agent and an advisor may be tricky for investors since no guidelines regarding their qualification or eligibility are in place yet; few investors are proactive enough to run a background check on the agent or advisor. But the investors’ task is set to becomes easier with the capital market regulator, the Securities and Exchange Board of India (Sebi), coming up with draft guidelines on regulation of financial advisors.
What’s more, the quality of advice may also change with the draft guidelines proposing introduction of certain practices. The regulator has invited public comments on the draft guidelines by 31 October.
What’s been proposed?
Minimum qualification: Sebi has proposed a minimum qualification without which an individual cannot work as a financial advisor.
Sebi has proposed that an individual needs to be either a chartered accountant, an MBA in finance or needs to hold similar qualification or should have at least 10 years of relevant experience in the field. In addition, individuals would be required to have a certification from Sebi-approved organisations such as National Institute of Securities Markets.
In case of advisory services from banks, at least two key personnel of the bank would be required to have relevant experience and necessary certification.
Self regulation: In order to put a check on the activities of financial advisors, the regulator has proposed setting up of a centralized self regulatory organization (SRO), which would frame rules for advisors and monitor their activities.
Individuals in the advisory business would have to register themselves with the SRO and would have to comply with its rules and regulations.
Besides individuals, even portfolio managers who only provide investment advice would be required to register with the SRO. In fact, most institutions meting our advice on financial instruments such as banks would have to register with the SRO.
Emphasis on independent advisors: An individual would be termed an investment advisor if he provides investment advice directly or indirectly for a consideration from the investor and not as a representative of a particular company.
Higher transparency: An advisor would have to inform investors upfront whether he is working as an agent for a particular company or as an independent advisor.
Sebi has also proposed that investment advisors should do adequate risk profiling of each client before recommending a service. They would have to maintain records of such risk profiling and investment advice for at least five years. In case the advice is provided verbally, an audio record of the same needs to be saved.
As of now since advisors do not need to maintain any record as of now, investors are hardly in a position to produce proof of any fraudulent practices.
“Agents generally recommend products of companies that pay higher commission, irrespective of the need of the customers. If new guidelines are implemented, people would be able to distinguish agents and advisors which may reduce mis-selling,” says Kartik Jhaveri, founder and director, Transcend Consulting India Pvt. Ltd, a Mumbai-based financial planning firm.
Who is not covered?
Advocates and chartered accountants, who provide advice in their respective professions, are also out of the ambit.
It also excludes newspapers and the broadcast media. Additionally, stock brokers and sub-brokers, who provides investment advice without charging any fees, and any person offering only insurance broking under the regulations of the Insurance Regulatory and Development Authority will not be covered under the proposed investment advisor regulation. In addition to simplifying your quest for correct advice, the draft guidelines may encourage agents to upgrade their skills. This, too, would benefit you since the quality of advice in general would improve. Higher transparency would of course help.
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