CONCEPT PAPERONREGULATIONOF INVESTMENTADVISORS
1.1 Section 11 (2)(b) of SEBI Act empowers SEBI to register and regulate working of
Investment Advisors and such other intermediaries who may be associated with
securitiesmarketin any othermanner.
1.2 As decided by SEBI Board in its meeting dated March 22, 2007, SEBI had posted a
consultative paper on the “Regulation of Investment Advisors” on its website inviting
public comments. Based on public commentsreceived on the consultative paper as also
the USAID (Fire Project), a memorandum was placed before the SEBI Board proposing a
regulatory approach forInvestment Advisors. It was proposed that the Regulationsshall
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and the distributors which sell these products who call
themselves by various nameslike agents,financial advisors,financial planners, etc.
2.2 It is necessary to resolve or at least mitigate these conflicts, especially in the case of
financial products because of their two peculiar characteristics. Firstly, the products arePage 2 of 11
intangible and conceptually more difficult to understand. Secondly, the pay‐offs are in a
distant future and can be camouflaged by several factors externalto the product. Itisin
this context that the distributors occupy a key role; all the more so considering the low
levels offinancial literacy and awarenessin India.
2.3 Two major conflicts of interest in the financial product distribution space are the
a. Dual role played by distributors as an agent of investors as well as of the
manufacturers. This is due to the fact that with respect to many financial products,
agents receive their payments from two sources: commissions from the
manufacturers (either directly or through deductions from the investment amount
of investors), and advisory fees or other charges received from the investors. This
immediately raises the question: whose interests do they represent: the
manufacturers’ orthe investors’? This question has also been raised in the Devendra
Swaroop Committee report on ‘Minimum Common Standardsfor Financial Advisors
and Financial Education’. This prevalence of divided loyalties may not be in the best
interest of all the stakeholders concerned. It often results in a situation where the
distributors are loyal to only themselves. They would happily churn investors’
portfolio and also squeezemore commission fromthemanufacturer.
b. A situation might arise where distributors are likely to be partial to, and would sell
more products ofthemanufacturer who isthe best paymaster; and ultimately, other
manufacturers would scramble to do the same,thusleading to a race to the bottom.
Thus,there is an inherent conflictin the activities of an agent/distributor distributing
similar products of variousmanufacturers.
2.4 There could be many possible solutions to these issues ‐ the most obvious and the
easiest being enhanced disclosures. However, in a country like India where levels of
literacy are low and financial literacy even lower, disclosures have a limited effect.
2.5 The Financial Services Authority, UK, had outlined plans to ban commission payments
for product providers and enforce financial advisors to agree on fee payments with
clients upfront. It defined two categories ofservice: independent and restricted, on the
basis of which advisors would charge the fee. Examples of restricted advice may be
where advisors offer advice only about the products of a particular manufacturer; or
about the products from a defined list of manufacturers. Independent advice would
include unrestricted advice based on a comprehensive and fair analysis of the relevantPage 3 of 11