Over the last few years, SEBI has been quite perturbed by the breed of advisors who literally survive on giving hot tips to the financial market customers. Most small investors tend to believe these tips as they are easy to understand and simple to execute. In the process, these investors end up investing in stocks and asset classes that are not exactly meant for them. It is in this light SEBI proposes a major re-haul for investment advisors.
Risk profiling please
One of the major clauses of the new RIA policy is that all investment advisors have to mandatorily do risk profiling of the client before giving them investment recommendations. Risk profiling helps the advisor to dovetail the right class of investments to the risk appetite and the risk capacity of the investor. A 60-year-old investor cannot be a candidate for buying a sector fund just as a 25-year-old professional would be wasting his risk capacity by investing in liquid funds. Such finer points can be thrown by a detailed risk profiling. While the idea is laudable, the practical implementation may be a lot more complex. Firstly, there is no standardized risk profiling tool. A better method would be to authorize a common basic profiler on which RIA should be allowed to build. Unless this process is standardized, it is unlikely to be effective. Also, there are many cases where small investors are not interested in detailed profiling and that choice needs to be respected.
No free trials to customers
RIAs often give free trials and pay-later schemes to potential clients. The idea is that such samples can be used to woo the clients to avail fee-based services. Now SEBI has put a ban on such freebies since such advice is not based on risk profiling as explained in the first paragraph. This would actually make the entire task very rigid. Most RIAs are independent professionals and are under pressure to expand their client base to keep their business profitable. However, banning free trials would take away the flexibility that the RIA enjoys vis-à-vis the clients. Of course, once the client is on-boarded, then SEBI is right in insisting on a detailed profile. The RIAs must have greater leeway to offer their palate of services to customers.
Disclosure of complaints
SEBI also wants that all complaints received by the RIA should be disclosed on the website of the RIA. This would tantamount to negative publicity for their business interests and is best avoided. With the proliferation of social media and other discussion forums, the very concept of a complaint has become broader and all-encompassing. Ideally, SEBI can mandate that complaints that are not redressed within a span of 15 days must be disclosed; which is fair. That will put pressure on RIAs to reduce TAT. RIA is still a young profession and too much regulation will not help! ©