On September, 23 2020, Wednesday SEBI issued a circular outlining the detailed guidelines of client level segregation of advisory and distribution activities. The circular even mentioned about capping limit of advisory fees.

As per the circular client level segregation of advisory and distribution activities, agreement and fees to be charged are aligned together.

To ensure client-level segregation at the IA’s group level, Sebi said existing clients who wish to take advisory services will not be eligible for availing distribution services within the group/family of IA, and vice versa for those availing advisory services.

It further said a new client will be eligible to avail either advisory or distribution services within the group or family of the investment advisers and this option needs to be made available at the time of boarding.

To ensure client level segregation at Investment Adviser’s group/family, the existing clients, who  wish  to  take  advisory  services, will  not  be  eligible for availing distribution services within the group/family of independent advisers (IA). Similarly, existing clients  who  wish  to  take  distribution  services will  not  be  eligible for availing advisory services within the group/family of IA.

A  new  client  will  be  eligible  to  avail either advisory or distribution services within the  group/family  of  IA. However, the option to avail either advisory services or distribution services shall be made available to such client at the time of on boarding.

Client under these guidelines shall include individual client or non-individual client. The client shall  have  discretion to continue holding assets prior to the applicability of  this  segregation  under  the existing advisory/distribution arrangement.

Plus, the IAs have to even follow the following as well when handling of accounts of existing clients :

  • The client shall not be forced to liquidate/switch such existing holdings i.e. PAN of each client shall be the control record for identification and client level segregation.
  • In case of an individual client, “family of client” shall be reckoned as a single client and PAN of all members in “family of client” would jointly and severally be the control record.
  • However, the same is not applicable for non-individual clients.
  • The dependent family  members  shall  be  those  members  whose assets on which  investment  advisory  is  sought/provided, originate from income  of a single entity i.e. earning individual client in the family. The client shall provide an annual declaration or periodic updation as the case maybe in respect of such dependent family members.
  • IA shall, wherever available, advice direct plans (non-commission based) of products only
  • The investment adviser shall maintain on record an annual certificate from an auditor  (in  case  of  individual  IA) and  its  statutory  auditor  (in  case  of  a  non-individual   IA)   confirming   compliance   with   the client   level   segregation requirements as specified in Regulation 22 of amended IA Regulations. Such annual certificate shall be obtained within 6 months of the end of the financial year and form part of compliance audit, in terms of Regulation 19(3) of the amended IA Regulations

Besides this the advisors are not to charge beyond a limit specified as under and by either of the two modes but not both.

  1. Assets under Advice(AUA)mode:

    The maximum fees that may be charged under this mode shall not exceed2.5 percent of AUA per annum per client across all services offered by IA. And for that the IA shall be required to provide supporting documents like demat statements, unit statements etc. of the client. Plus, any portion of AUA held by the client under any pre-existing distribution arrangement with any entity shall be deducted from AUA for the purpose of charging fee by the IA.

  2. Fixed fee mode:

    The maximum fees that maybe charged under this mode shall not exceed INR 1,25,000 per annum per client across all services offered by IA.

As per the circular the general conditions for both modes are as under:

  • In case “family of client” is reckoned as a single client, the fee as referred above shall be charged per “family of client”. IA shall charge fees from a client under any one mode i.e. 1 or (B) on an annual basis. If the client wants to change of the mode he shall be allowed only after 12 months of on boarding/last change of mode.

  • If the client agrees, the IA can charge fees in advance, but it shall not exceed fees for 2 quarters. In the event of pre-mature termination of the IA services in terms of agreement, the client shall be refunded the fees for unexpired period. However, IA may retain a maximum breakage fee of not greater than one quarter fee.

Further the circular also added, the criteria regarding qualification, maintaining records and restrictions on number of clients.

The existing individual IAs those who are above 50 years of age as on September 30, 2020, will not be required to comply with the qualification and experience requirements but will require to hold NISM-accredited certification.

As per the norms, IA must have a post-graduate degree in specific subjects and five years of work experience related to advice in financial products or securities or portfolio management.

An employee associated with investment advice also needs to have such a post-graduate degree and two years of experience.

On registration as non-individual investment adviser, Sebi said an individual IA can apply for registration as non-individual investment adviser on or before reaching 150 clients.

Once number of clients reaches 150 and till grant of registration as a non-individual IA, Sebi said individual IA will not on-board fresh clients.

However, during the period of examination of application by Sebi, individual IA will continue to service existing clients. In case the IA does not get registration, such IA will continue the advisory activities.

“Existing individual IA having more than 150 clients as on September 30, 2020 shall not on-board fresh clients and such Individual IA shall apply for registration as non-individual IA latest by April 1, 2021,” the regulator noted.

The IA will have to maintain records of interactions with all clients, including prospective clients (prior to on-boarding), where any conversation related to advice has taken place in the form of SMS or telephonic conversation, among others.

Such records will begin with first interaction with the client and will continue till the completion of advisory services to the client. They need to maintain these records for a period of five years.

However, in case where a dispute has been raised, such records will be kept till its resolution or if Sebi desires that specific records be preserved, then such records will be kept till further intimation from the regulator.

The deadline for compliance for these guidelines ranges from January 1, 2021 to April 1, 2021, the Securities and Exchange Board of India (Sebi) noted.

Sebi had floated a consultation paper on investment advisers in January and after considering the inputs from public notified the norms in this regard in July and these amended norms will come into force on September 30.

What should advisers do?

Current situation of pandemic is here for a long haul and these regulations are strict so that the investors and clients don’t feel cheated. Investors/clients look up to you as their ‘financial guardian’ who prudently guides and handle their money with enough care and prudence (much as you would while managing your own hard-earned money). When service is offered diligently, it will earn you the goodwill and help grow your financial advisory business successfully.

Hence,  serve investors/clients, empathetically, ethically, transparently, proficiently, and hand-hold them in the journey of wealth creation, especially during these turbulent times.

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