Important clarifications for Investment Advisers (RIAs)

In September 2020, SEBI notified the new changes to the Registered Investment Advisers (RIA) guidelines. There were a few big and important changes in the new guidelines: 

1. Segregation of advisory and distribution at a client level
2. Mandatory agreement between advisers and clients before any advice was given
3. Capping of fees at 2.5% for AUM based models and Rs 1,25,000 PA for fixed-fee models. 
4. Enhanced educational qualifications and net worth requirements

There were differing opinions and doubts among online investment platforms, wealth management platforms, and brokers about the applicability of the guidelines. Particularly around charging fees in various forms and agreements between advisers and clients. 

In response to two informal guidance [1, 2] sought by a broker and online investment platform, SEBI has clarified a lot of these issues. These clarifications apply to online investment platforms, wealth management platforms, and brokers registered as investment advisers (RIAs). 

Brokers who are RIAs cannot charge brokerage for implementing advice

Several brokers are also registered as investment advisers (RIAs) and offer advisory services. Clients of such brokers typically execute the advice on platforms offered by the brokers. In response to a query about whether brokers can charge brokerage for execution, SEBI has clarified that brokers cannot charge a brokerage if a client executes the advice. 

Meaning, if a brokerage offers an advisory product, it cannot offer it for free and charge a brokerage instead. It has to explicitly charge an advisory fee – either flat or an AUM based fee separately. And the broker cannot debit the client’s trading account for charging the advisory fee either. The client has to separately make the payment from his bank account. 

Though the ability to deduct the clients’ trading account would actually make things easier and would enable brokers and other startups to offer affordable advice at scale. The friction with fee collection is one of the biggest problems for the Indian advisory ecosystem. 

An agreement has to be mandatorily signed before advice

SEBI has clarified that an adviser has to mandatorily enter into an agreement with the client before providing advice. More importantly, electronic consent mechanisms like “I agree” checkboxes etc are invalid. The agreement has to be either e-Signed or physically signed. This is regardless of whether the RIA is charging a fee for the advice or offering it for free. 

So if you are building a digital advisory or investing platform with a freemium model with a mix of free and paid advice, you’ll still have to have the agreement in place.

Reimbursement of KYC, payment gateway, and other ongoing client maintenance costs

Today, pretty much all of the online investment platforms that offer direct plans of mutual funds are free. Most of them bear the cost of KYC, payment gateway, and other tech costs without passing them to the clients. In response to the query about whether platforms can ask AMCs to reimburse those costs, SEBI has clarified that’s not allowed. 

The only option for the platforms is to monetize their user base in some form. It could be through advisory fees, charging for execution, or cross-selling other financial products.