Registration of Investment Advisors

SEBI has uploaded a concept paper on regulation of investment advisors to its website on 26Sep’11 and has been inviting comments from the public till 5:30pm, 31Oct’11. The contents of SEBI’s discussion paper look so very similar to the provisions of the Regulation of Investment Advisors in the US. In the US, investment advisors are regulated by the Investment Advisors Act of 1940. At the state level (or depending on the net worth/size of operation of such advisors) they could alternatively be governed by the Series 66 regulation or the Uniform Securities Act (click to download).

The following caught my eye from SEBI’s discussion paper:

  • This thing has been going on since Mar 2007. A committee and a sub-committee
  • The regulation is proposed to be implemented through a Self Regulating Organisation (SRO). Hopefully that will be without sin.
  • Duality of market participants as sometimes they act as agents of the producers of the financial products they sell and sometimes they act as advisors to the end consumers.
  • The role of the SRO will be to cleave this duality and make advisors (somewhat) accountable
  • The paper trashes enhanced level of disclosures as an effective tool since it cites India’s lack of (financial) literacy and generally high levels of information asymmetry as being two facts that would blunt the effectiveness.
  • Any entity of individual providing investment advise – whether it be a bank, wealth manager, private banker etc will have to announce him/her/themself as an investment advisor. Period.
  • Advocates, chartered accountants, media publishers, etc will be exempt. I guess the exemption naturally extends to blog authors as well – if at all someone felt that the category was subject matter of the discussion paper.
  • Folks wishing to get registered under the aegis of the SRO need to be chartered accountants from ICAI, MBAs in Finance or have a relevant work experience of at least 10 years.  

Obviously, it’s a good practice to copy regulations from advanced markets but it’s also important to recognise that such regulation did not prevent the gross mis-selling of financial products in the US – the latest example being home mortgages. Investment advisors, whether registered or not – packaged homes as ATM machines and sold them to the American public.

I have two comments/suggestions to make:

1. With relation to advertising and general disclosure: It should be made mandatory for registered investment advisors in India (whenever such a breed be whelped) to declare their historical track record of investment advise rendered. Accepted that information flows may be asymmetric in India and that most of the consumers of financial products may be financially illiterate, but I don’t think they are so illiterate as to not appreciate quantitative measures of historical track record of the advisors they are dealing with.

2. Buying a house is definitely THE most important and largest financial transaction that Indian investors commit themselves to. Do the objects of this discussion paper touch the property buying process? Or are young property buyers always to depend on the mortgage provider (i.e. producer) to act as financial advisor? Maybe some scheme or arrangement that notifies some independent advisors as being registered property purchase investment advisors. Maybe property buyers get an incentive for buying property via such advisors….i dont know what may work, but i thought this is an important area that may need independent and unbiased investment advise. A natural extension of this point is the question that asks if “real estate brokers” be considered as investment advisors or not?

About Kaushal

One Response to Registration of Investment Advisors

  1. smallivy says:

    I’m convinced more and more that the only purpose of registration and certification is to protect those who are in a business by putting up barriers to others wanting to enter the business. In the US there are far too many Certified Financial Planners and the like who are selling specific mutual funds to their customers because they are getting commissions. Also, which would be better to advise on how to invest int he stock market, a guy fresh out of college who studied insurance, finance, and a little about the markets or a guy who has traded for 20 years?

    A better system is to have reviews on the web and let individuals gain business via their reputations.


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