Registering An Investment Advisory Firm: Navigating India's Regulations

The Indian financial market has become an attractive place to invest and grow wealth. Registered Investment Advisors (RIAs) are experts in the financial market and help investors make profitable decisions. In India, RIAs are registered with the Securities and Exchange Board of India (SEBI). The process of registering as an RIA in India involves meeting eligibility criteria, passing a certification exam, and complying with SEBI regulations. The eligibility criteria include educational qualifications, work experience, and net worth requirements. The certification exam is conducted by the National Institute of Securities Markets (NISM). SEBI regulations outline the code of conduct, disclosure norms, and investment advisory services that RIAs must adhere to. The registration process involves submitting an application, paying a fee, and obtaining approval from SEBI. This process ensures that RIAs provide trustworthy and unbiased advice to their clients.

Eligibility criteria for RIAs

To be eligible to become a Registered Investment Advisor (RIA) in India, you must meet the following criteria:

Education and Experience:

• A bachelor's degree is the minimum educational requirement, with a master's degree in a finance-related field preferred by some firms.
• Obtaining relevant work experience is advantageous. This can be achieved through internships or entry-level positions to gain familiarity with financial terminology and strategies.
• A professional certificate, postgraduate degree, or postgraduate diploma in finance, business administration, accounting, commerce, capital markets, economics, banking, insurance, or actuarial science from a recognised university or institution is ideal.
• If the minimum qualification is not met, a graduate degree in any discipline with at least five years of experience in financial product advice is required.
• Certification by NISM or another recognised organisation in financial planning, fund, asset, portfolio management, or investment advisory services is essential.

Skills:

In addition to academic qualifications, possessing strong interpersonal skills, communication skills, organisational skills, enthusiasm, and customer service skills will enhance your eligibility.

Net Worth:

Individuals must have a net worth of at least Rs. 1 lakh, while non-individual entities (corporations, partnership firms, etc.) must have a net worth of Rs. 25 lakhs or more.

Age and Criminal Record:

• The minimum age requirement is 21 years.
• There should be no prior convictions for any economic offence or violation of securities laws.

Other Requirements:

• The candidate should not be a stockbroker, sub-broker, or depository participant, or associated with one.
• Employees and representatives of investment advisory firms who interact with clients and provide advice should also register with the Securities and Exchange Board of India (SEBI).

Registration as an Investment Advisor

To become a Registered Investment Advisor (RIA) in India, one must register with the Securities and Exchange Board of India (SEBI). SEBI regulates the registration of Investment Advisors (IAs) under the SEBI (Investment Advisers) Regulations, 2013. This regulation defines an investment advisor as someone who advises on investing in securities or provides research analysis.

Any individual or entity that falls under the definition of an investment advisor must register with SEBI. This includes individuals, partnership firms, LLPs, companies, and any other entity that provides investment advisory services for a fee. Employees and representatives of investment advisory firms who interact with clients and provide advice should also be registered with SEBI.

However, those engaged in incidental advice, such as bankers, chartered accountants, or insurance agents, are not required to register. If they wish to provide investment advice as a primary service, they can choose to register with SEBI as an IA.

To become an RIA, one must meet the eligibility criteria, which include:

• A relevant degree: A graduate degree in finance, economics, business administration, or a professional qualification such as a CA, CFA, or MBA.
• Work experience: A minimum of five years of relevant experience is required.
• No prior convictions: The applicant should have no history of economic offences or violations of securities laws.
• Net worth: Individuals must have a net worth of at least Rs. 1 lakh, while non-individuals must have Rs. 25 lakhs.
• Certification: Passing the NISM-Series-X-B: Investment Adviser (Level 1) certification exam is mandatory.

The registration process involves the following steps:

• Meet the eligibility criteria: Ensure that you have the necessary educational qualifications and work experience in related fields.
• Pass the NISM certification exam: This is a crucial step towards becoming an investment advisor.
• Apply for SEBI registration: Submit Form A to SEBI, along with the necessary documents, including identification, qualifications, experience, CIBIL Score, net worth certificate, income tax returns, and an application fee of Rs. 5,000.
• Wait for SEBI's response: SEBI will review the application and may seek additional information if required.
• Obtain SEBI approval: Once your application is approved, SEBI will issue a registration certificate, and you can start offering advisory services.
• Comply with regulations: It is essential to adhere to SEBI regulations and maintain ethical standards when providing investment advice.

It is important to note that RIAs have certain obligations, including acting in their client's best interests, providing unbiased advice, disclosing all information about their products and services, maintaining detailed records, and complying with advertising, marketing, and client confidentiality regulations.

Agreements between clients and RIAs

• Identification of the Client: Clearly identify the client, whether they are a single natural person, a couple, a business entity, or a retirement plan. If there are multiple clients, such as joint account holders, consider adding language that clarifies how the adviser will provide advice and manage accounts based on the collective goals of the clients.
• Effective Date: Specify the date on which the agreement will become effective, which is typically the date the advisory relationship officially begins and fees can be calculated.
• Disclosure Document Delivery: Include a provision stating that the client acknowledges receiving all necessary disclosure documents, such as Forms ADV Part 2A/B and Form CRS, and consenting to electronic delivery of these documents if applicable.
• Client Responsibilities: Outline the client's responsibilities, such as providing complete and accurate information, reviewing disclosure documents, and informing the adviser of any changes in their financial situation or restrictions on investments.
• Financial Exploitation Reporting: Include a provision that allows the adviser to report any suspected financial exploitation of the client to relevant authorities and take appropriate actions to protect the client's interests.
• Disclosure of Risks: While not required to include the risk disclosures from Item 8 of Form ADV Part 2A, the agreement should disclose that investment recommendations involve risks and that future performance is not guaranteed.
• Dispute Resolution and Choice of Law: Describe how disputes between the adviser and the client will be resolved, including the venue, forum, and choice of law. This can include arbitration, mediation, or court proceedings.
• Limitation of Liability: Address any limitations on the adviser's liability for their own actions and those of third parties. However, be cautious when including "hedge clauses" as the SEC has recently scrutinized these provisions.
• Amendment and Modification: Specify the process for amending or modifying the agreement, including whether express written consent from both parties is required or if passive/negative consent is acceptable.
• Termination: Outline the process for terminating the agreement, including any required notice period and the prorating of fees through the termination date.
• Miscellaneous Details: Include standard boilerplate language covering notice provisions, savings/reformation clauses, and a statement that the agreement supersedes any prior agreements.
• Signatures: Obtain signatures from both the adviser and the client, either physically or electronically. Ensure that the agreement complies with the Electronic Signatures in Global and National Commerce Act (ESIGN) for electronic signatures.

These agreements should be tailored to each client and accurately reflect the specific services provided and fees charged by the adviser. While it may not be necessary to have an attorney review every individual agreement, seeking legal advice when drafting template agreements is advisable to ensure compliance with federal and state securities regulations.

Fee structure for SEBI registration of investment advisors

The Securities and Exchange Board of India (SEBI) has introduced a fee mechanism to regulate the charges levied by a SEBI-registered investment advisor. There are two types of fee structures:

• 2.5% of Assets under Advice (AUA) per annum per family
• INR 75,000 per annum per family

SEBI recognises two types of fees: a fee not exceeding INR 1.25 lakh a year or a fee not exceeding 2.5% of assets under advice per year. Here are some of the fee structures that fall under these categories:

• Flat Fees: Registered Investment Advisors (RIAs) charge a flat rate for all clients regardless of their net worth. A slightly higher flat rate is charged for NRIs. This fee cannot exceed INR 1.25 lakh a year per client.
• Hourly Fees: The rate per hour is fixed for all. Typically, the time spent per client is about the same, so the fee is usually flat. This fee cannot exceed INR 1.25 lakh a year per client.
• Percentage of Net Worth: This fee is based on the client's net worth, also known as assets under advice. The higher the net worth, the higher the fee. This fee cannot exceed 2.5% per year per client. It's important to note that a higher fee doesn't necessarily mean the advisor will work harder or fetch higher returns.
• Fees Depending on Complexity: Some RIAs charge a flat fee that depends on the effort involved in providing advisory services, often subject to a ceiling. This fee cannot exceed INR 1.25 lakh a year per client.

It's worth noting that some Registered Investment Advisors may charge additional fees for services beyond investment advice, such as financial planning, portfolio management, retirement planning, and tax planning. These fees would depend on the specific services provided and the scope of work involved.

Post-registration compliance for Investment Advisors

Once an investment advisor has obtained their SEBI registration, they must comply with ongoing obligations and adhere to specific procedures and practices when providing advice to their clients. Here are the key areas of post-registration compliance:

• Reporting Requirements: Investment advisors are required to meet the reporting requirements set out by SEBI. They need to regularly monitor the SEBI website for any updates, circulations, or guidelines issued by the regulatory body.
• Transparency and Disclosure: Investment advisors must ensure transparency in their dealings with clients. They should disclose all relevant information about their investment products and services, including associated charges.
• Record-Keeping: Advisors must maintain detailed records of all client transactions and interactions. This helps ensure transparency and accountability in their advisory services.
• Conflict of Interest: Investment advisors must identify and address potential conflicts of interest. They should disclose any conflicts to their clients and ensure that their advisory services remain unbiased and in the best interests of the clients.
• Suitability of Investment Advice: When clients inquire about the suitability of an investment, advisors must explain the selection process, risk mitigation strategies employed, and why the recommended asset is appropriate for the client's needs.
• Risk Profiling: Registered investment advisors are required to carry out risk profiling for their clients before providing any investment advice. This helps ensure that the advice given is suitable for the client's risk tolerance and investment goals.
• Complaints and Dispute Resolution: Investment advisors must display complaints received on their websites and resolve them promptly. SEBI provides a dispute resolution mechanism to help investors resolve conflicts with their advisors.
• Fee Structure: SEBI has introduced a fee mechanism to regulate the charges levied by investment advisors. Advisors can charge either 2.5% of Assets under Advice (AUA) per annum per family or a flat fee of INR 75,000 per annum per family.
• Compliance Audit: Investment advisors must undergo an annual compliance audit to ensure adherence to SEBI regulations and circulars. This audit must be conducted by a Practising Company Secretary (PCS) or Chartered Accountant (CA) and reported to the BSE Administration and Supervision Limited (BASL).
• Prohibited Activities: As per SEBI guidelines, investment advisors are prohibited from providing free trials of their services or accepting partial payments for their services. They are also not allowed to sell securities or investment products to, or purchase them from, their clients.

Frequently asked questions