Clever mechanisms that bypass Sebi rules for Ias


The pure intention of Sebi’s Investment Advisor (IA) regulation is to ensure that clients get the best investment advice without any conflict of interest. Here are the essentials of the regulations, first implemented in 2013 and modified over the years:

An IA must be registered before providing advice to investors; RNs can only collect consulting fees from clients. They cannot take commissions, brokerage, referral fees, facilitation fees, etc. ; if a client registers as an advising client, the advising entity and the entire group of companies of which the IA is part cannot collect any commission, brokerage or sales fees from the client or the client’s family/group; any intermediary that does not have IA certification cannot provide investment advice in any format.

Many product distributors, whether wealth managers, brokers, etc., are reluctant to become IAs because they cannot earn commissions on products or investments that earn them between 1-5% depending on the type of products sold. But with the growing demand for “advisory” services, some clever mechanisms have come into play to meet the needs of investors seeking them. Here are a few:

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Portfolio Management Service (PMS) Tip: Use of this channel does not explicitly prohibit the intermediary’s owning group from earning product commissions by selling third-party products to the client. Additionally, although the PMS manager may choose to invest in the direct option of mutual funds, they will not have access to low fee options in PMS & AIF (Alternative Investment Funds) which are only available only for registered investment advisers (RIA). It goes without saying that this route is not heavily regulated.

Pushing in-house products: This is the most common practice in which the AI ​​uses in-group manufactured products to earn management fees, operating costs, etc., as well as a carry or a profit share of up to 1-4%. In all of these cases, the may even charge a seemingly “low” advisory fee.

The F Way: While the F platform was launched to offer higher risk or alternative funds, the platform has recently seen all sorts of structuring, including the use of pure debt strategies or long actions only that do not conform to the “A” in F, that is, alternative. But even then, we saw a series of equity-listed products and mixed asset allocations. This platform can be used as follows:

First, advisors use a “model portfolio” F-scheme to allocate a very large portion of the client’s money. So even though they could have done the asset and product allocation at the advisory account level, the same structuring is done inside the F, which obviously can now charge 1-2% management fees, operating costs and possibly also a carry. This goes directly against the whole foundation of AI regulation. Also, there is no regulation that they can earn commissions and brokerage when selecting products. Second, the advisor structures a new F for each Ultra High Net Worth Individual (UHNWI) – this option bypasses the AI ​​guidelines and creates a concurrent structure that has very light regulations, mostly reporting. This does not explicitly prohibit the intermediary from earning commissions or brokerage by adding these products to the F. It can get worse when the intermediary adds some in-house products to the Model F portfolio!

If investors really need genuine advice, they need to ask questions and not get carried away with branding, company size, and other sales tools. First, they need to make sure they are registering with an investment advice platform. Second, they need to be aware and sensitive to any homemade product offered to them. Third, UHNWIs and family offices must ensure that the entity has no conflict of interest that could cause them to provide primarily biased advice.

Munish Randev is founder and CEO of Matterhorn Family Office & Advisors.

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