HOW SEBI’S NEW RULES COULD TRANSFORM THE ADVISORY SECTOR

Relevance

GS 3 – Economy:

  • Understanding the role of regulatory frameworks in enhancing financial markets.
  • Promoting inclusive growth.

Focus

  • This analysis looks at the recent suggestions from the Securities and Exchange Board of India (SEBI) that are meant to help struggling investment advisers and remove entrance barriers.
  • The main goal is to comprehend how these regulations will affect the advice industry and the larger financial system.

HOW SEBI’S NEW RULES COULD TRANSFORM THE ADVISORY SECTOR - UPSC

Current Scenario

  • Underserved Market:
    • In India, where there are 1.4 billion people, there are just 1,300 registered investment advisers (RIAs), in contrast to 47.6 million mutual fund clients and 96 million direct stock investors. This suggests that the consulting market is significantly underpenetrated.
    • The mutual fund industry saw a 14% increase in assets under management (AUM) in 2023, according to the Association of Mutual Funds in India (AMFI). This growth in investor interest suggests the need for expert advisory support.
  • Current Requirements:
    • The strict registration and compliance standards that RIAs must adhere to, which include requirements related to education, experience, and net worth, have impeded the expansion of the advisory industry.
    • For many prospective advisers, the current prerequisite of a graduate degree plus five years of experience or a post-graduate degree has proven to be a substantial barrier to entry.
  • Consultation Paper:
    • To address these issues, SEBI’s consultation paper suggests a number of easings and modifications that should boost the quantity of RIAs and improve the caliber of advising services.
    • It is anticipated that the proposed modifications will greatly expand the number of registered advisers, improving investor access to qualified financial advice.

Key Issues

  • Entry Barriers:
    • Educational Requirements:
      • A post-graduate degree or a graduate degree combined with five years of experience is currently required per the guidelines. In order to reduce educational hurdles, SEBI suggests enabling graduates of any discipline to hold the position of main officer of RIAs.
      • Industry estimates indicate that this adjustment may result in a 25% rise in the number of competent advisers.
    • Experience Criteria:
      • To make it easier for new entrants to qualify, the proposed rules seek to reduce the two-year experience requirement for others and eliminate it for post-graduates.
      • It is anticipated that the easing of the experience requirements will draw more youthful people to the advice industry.
    • Net Worth:
      • It is suggested that the net worth criterion for corporate RIAs stay at ₹50 lakh with a client-based adjustment, and for individual RIAs, it be lowered from ₹5 lakh to none.
      • The purpose of this cut is to encourage more people to become registered advisers by removing financial obstacles.
    • Regulatory Framework:
      • Re-certification: Instead of the present five-year re-certification procedure, SEBI suggests a more relaxed three-year process with continuous professional development (CPD) criteria to uphold the calibre of advisory services.
      • Corporatization: In order to improve organizational structures and governance, mandatory corporatization is suggested for RIAs that advise more than 300 customers or ₹100 crore in assets.
    • Advisory Scope:
      • Product Advice: RIAs will be permitted to provide advice on a wider variety of items, such as gold, real estate, and legal asset classes. The goal of this is to offer clients full financial planning services. Advisers may see a 15-20% boost in revenue streams from the addition of new asset classes.
    • Fee Models:  To accommodate varying client needs and improve adviser compensation, SEBI suggests fee structures that are flexible and permit both fixed and variable charge models which could result in a 10% rise in client retention rates.
    • Compliance and Client Management:
      • Clarity on Roles: It is suggested that there be a distinct separation between the distribution of financial products and investment advice in order to maximize openness and reduce conflicts of interest and to boost the consulting profession’s standing.
      • Customer Interaction: RIAs are required to disclose to clients the type and extent of services they offer, and they must keep accurate records of all interactions with clients and advice given. The purpose of this rule is to guarantee increased accountability and openness in client interactions.

Statistical Data

  • Adviser Penetration:
    • Present Penetration: In comparison to international norms, the advisor-to-investor ratio is notably low, with just 1,300 RIAs servicing millions of customers. By removing obstacles to entry, the suggested modifications hope to increase this ratio.
    • Growth Projections: Over the next few years, it is anticipated that SEBI’s activities would result in a large increase in the number of RIAs, possibly doubling the existing number.
  • Investing Patterns:
    • Market Involvement: There are now 96 million direct stock investors, indicating a rise in the need for expert advisory services. This expanding investor base will be catered to by improved RIA regulations.
    • Product Diversification: By enabling RIAs to provide advice on a wider range of financial products, a more stable and inclusive financial market can be fostered by helping clients diversify their portfolios and lowering risks.
  • Economic Impact:
    • Financial Literacy: A better-informed investor base is anticipated as a result of the proposed amendments, which are expected to improve financial literacy and inclusivity. This fits nicely with the government’s larger goal of financial inclusion.
    • GDP Contribution: By enhancing investment choices and encouraging a save-and-invest mentality, a stronger advice industry can support economic expansion.

Sustainable Solutions

  • Professional Development: Implementing programs for RIAs’ ongoing professional development will guarantee that they are informed about developments in the market and in regulations and it could result in a 15–25% improvement in client satisfaction and advise quality.
  • Technology Integration: Promoting the adoption of fintech solutions, especially in underprivileged areas can enhance service delivery while cutting operating costs by 10% to 15%.
  • Client Education: Programs designed to inform customers about the value of expert counsel and the array of services provided by RIAs will lead in making knowledgeable financial choices, which lowers the possibility of mis-selling.
  • Ethical Standards: Enforcing stringent moral principles and behaviour norms to preserve the honesty and confidence in the advice industry. Raising ethical standards can result in a 25% increase in customer loyalty and trust.
  • Systems of Support: Creating mechanisms to assist RIAs in improving the calibre of advice they offer, such as access to analytics, research, and other resources. Having access to thorough information and analytics can help make investing advice more relevant and accurate.

Conclusion

By removing obstacles to entry, broadening the range of advisory services offered, and improving regulatory frameworks, SEBI’s new proposals for RIAs seek to revolutionize the advisory industry. It is anticipated that these modifications will boost financial inclusion, raise the quantity of certified advisers, and enhance the calibre of advising services. The actions implemented by SEBI have the potential to enhance the stability and expansion of the Indian financial market by mitigating the obstacles encountered by RIAs and promoting a more proficient and easily obtainable advice industry.

Mains Question

Discuss how SEBI’s new guidelines may affect India’s investment advice sector. How will these improvements improve financial inclusion and market stability? (250 words)

Source: Live Mint