An open letter to Mr.Market Regulator SEBI -From an RIA

Dear my blog readers, clients, and the common public, this time I am writing an open letter to market regulator SEBI through this blog. The reason is to bring into your notice also that what are the changes happening in the advisory field and how even it can impact to you also.


Dear Mr.Market Regulator SEBI,

This open letter is with respect to the recent consultation paper which you published it on 15th January 2020. I am really shocked by the way it was articulated. Hence, I thought to write an open letter to you.

# Working Group

You mentioned in the consultation paper that you constituted the working group to bring in the changes to the existing RIA Regulations Act 2013.

I have a few concerns with respect to the working group itself. Can you please clarify if you have time?

When a regulator or land of the law formulate the rules or regulations, then it is obvious that the regulator needs certain inputs from an expert committee.

However, as per my commonsense, such a working group should be INDEPENDENT and must not be in the same business of for which you are forming the regulations or laws. It is the basic and fundamental commonsense to avoid any CONFLICT-FREE suggestion.

However, I think this is not the case with respect to this working committee. I came to know from few that few BIG and CORPORATE RIAs were involved in this working group.

In such a situation, how you assumed that they will give you their expert opinion without any conflict involved?

It seems to be as if a politician who has his own educational institute and ruling the land as an education minister.

What I heard may be wrong. But for the sake of clarity, can you disclose the names of the members of the working group?

# How you have the same regulation for a direct stock adviser to a fee-only planner (who not recommend direct stocks)?

Again I may be wrong in my assumption. If so, then please correct me Mr.Regulator. When you first introduced the RIA Regulations, then how you assumed that the business module of an adviser who provides the direct stock suggestion is the same as that of an advisor who practices the fee-only financial planning service (where he will not provide any direct stock advice)?

Whether you assumed the advisory risk of an adviser who provides the direct stocks recommendation is the same as that of an adviser who only suggests Mutual Funds and other Debt instruments for his clients?

As far as my knowledge is concerned, the risk, business module and the thought process of an adviser who recommends the direct stocks is entirely different than an adviser who completely recommends Mutual Funds or other Debt instruments to his clients.

Or I assumed it wrong and jumped into this advisory business by registering myself as RIA?

When you have a different set of regulations for DIRECT and REGULAR Mutual Funds (even though the risk is same if someone buys it BLINDLY), then how you assumed that both the modules can be regulated under one set of rules?

# You FORGOT the basic idea itself of bringing in of this Regulation in 2013

When the regulation first time introduced in 2013, there was a clear idea of segregating the advisory module to the distributor module. So that those who wish to adopt an advisory module, they have to give up their distributor module and stick to the fee-charging.

Even during 2013 itself, you bring in the new definition calling ARMS LENGTH between our advisory and distributor business, which you and I also know how many managed this ARMS LENGTH in reality.

However, with this new consultation paper, indirectly you are offering an RIA to run both the modules of advisory and distributorship (with certain distance management).

Hence, is it a complete U-TURN of for what purpose the SEBI RIA Regulations initially introduced 2013.

# Educational Qualification for Non-Individual IA

In your consultation paper, you mentioned that Non-Individual IA has a qualification of Post Graduation along with other statutory examinations or certifications.

I just wish to ask you one question, as far as my dumb knowledge goes, to be eligible for selling mutual funds, one must have the minimum qualification of HSC (12th) or 10th + 3 yrs diploma holder. Also, he or she must pass NISM exam prescribed by AMFI.

With such basic education, one can easily become Mutual Fund Adviser and run his business to any extent and earn the commission from Rs.1 to Rs.100 Cr. His educational qualification will not change just because he turned from small mutual fund distributor to a big distributor of Rs.100 Cr commission earnings.

In that case, you felt it not necessary to increase his educational limit just because his business is increased.

However, in the case of IA, if I am a Graduate and turning to be NOT ELIGIBLE to run as an individual RIA, then I have to complete Post Graduate. How come my Post Graduation will suddenly impact my knowledge of advisory? Assuming I am a BCom graduate and to be eligible for Non-Individual RIA, I may choose the PG which is easy for me to complete and move on to register myself for Non-Individual RIA. But in what sense such Post Graduation brings in the value to my advisory and my compliance? ONLY GOD CAN ANSWER.

# Net Worth Requirements

It is proposed in your consultancy paper that Individual RIA must have a net worth of Rs.10 lakh and Non-Individual must have a net worth of Rs.50 lakh.

Also, if an individual RIA at any point of time crossed the number of clients numbers to 150 or AUM exceeds to Rs.40 Cr, then he must re-register as Non-Individual RIA.

Mr.Market Regulator SEBI, I am desperate to know on what basis the working group arrived at these figures of 150 clients, Rs.40 Cr AUM.

Let me give an example of fee-only planner. Assume that he is charging a flat fee of Rs.15,000 per client. Now we also assume that he has 150 clients. In such a scenario, the total fee he earned by charging to all his 150 Clients is Rs.22,50,000. In that, if we include his personal or family expenses and the cost of running the business, then I think one can end up with savings of around Rs.10 Lakhs to Rs.15 Lakhs.

In such a situation, how you arrived that if an RIA serving more than 150 clients is ELIGIBLE to garner the net worth of Rs.50 lakh and register himself as Non-Individual RIA?

You mean to say either YOU SHUT YOUR SHOP to allow ONLY BIG PLAYERS TO RUN RIA or go for BEGGING for funding of Rs.50 lakh for Non-Individual RIA?

Let us assume that I am a new individual RIA and I know well in advance that there is a fee cap of Rs.75,000 for each client and once I reach the 150 client numbers, then I have to register myself as Non-Individual RIA with accumulating Rs.50 lakh net worth.

In such a scenario, I have to charge a fee of Rs.33,333 (Rs.50,00,000/150) to make sure that I accumulate Rs.50 lakh to register myself in the future as Non-Individual RIA. This fee of Rs.33,333 is only to make sure that if my business grows in the future (beyond 150 clients and Rs.40 Cr AUM) then I must easily move to Non-Individual RIA.

Now, if I include my expenses to survive my business cost and run my family, then I MUST charge beyond Rs.33,333.

Mr.Regulator, how many Indian investors as per you are eligible or wish to pay the Fee beyond Rs.33,333 and avail my service? You and I are well aware that fee-only advisory is still at a nascent stage in India.

Hence, by bringing in such regulation, do you not feel that you are killing once for all the beautiful conflict fee advisory module of fee-only financial planning?

# Maintenance of Record

You proposed that RIA should maintain the records of below types of interactions with clients

a) Physical record written & signed by the client,

b. Telephone recording,

c. Email from registered email id,

d. Record of SMS messages,

e. Any other legally verifiable record.

I feel surprised that to run my business of RIA, I must from now onward (I mean when this consultancy paper implemented as an act) I must go for technology or software set up where I have to record my telephone interaction or SMS interaction with client.

Do you feel how many investors are comfortable if I say them that your each phone call discussion or SMS interactions will be RECORDED because my Mr.Regualtor forced me to record it as per the act?

I know, why you proposed this in this consultancy paper. There are many FAMOUS direct stock advisory scams happening across India from few RIAs (especially from the infamous INDORE). Hence, you proposed this. However, to my business module, where I work under the flat fee module and not recommending any direct stock recommendations, how much practical it is to convince my clients that each call will be recorded??

Conclusion:-Dear readers and my clients, now you may come to know how impractical are these suggestions by a working group of SEBI with respect to RIA regulations. SEBI failed at first instance of differentiating the business module of an adviser who is into direct stock advisory to an advisory who run the fee-only financial planning service by recommending without any direct stock advice.

I, you and regulator know that there are lot misuse happened in case of direct stock recommendations by few RIAs (especially from Indore). Hence, to bring such RIAs into strict regulatory ambit, SEBI may be thinking of such regulations. However, it kills the basic concept of the fee-only financial module where we the few (Fee-Only India Group) practicing this conflict-free module ethically to the best of our knowledge and in the interest of the clients are finding it hard to digest such impractical regulations.

I don’t have a choice in adopting if this consultancy paper turned to regulation. However, it is an uphill task for the new entrant to abide by these regulations and practice the fee-only module. Hence, the only option for them is to shut their shop once for a while.

Such impractical suggestions will kill the basic idea of bringing in the SEBI RIA Regulation 2013. It completely dilutes the idea of separation of advisory to the distributor module.

May be few of my words looks harsh and apologize for the same. However, my intention is not to target anyone but to bring in the hardship in running the business under this new consultancy paper.

Request:- If my blog readers, clients or the general public feel it is unfair, then you can directly write to SEBI [email protected] before 30th January 2020. The format is available in the consultancy paper. Please find the LINK of the Consultancy paper for Investment Advisers.

13 Responses

  1. Dear Basu ,

    You have really pointed out the important factors in this article , the first point specially for working group of SEBI as I was also thinking why SEBI is trying to implement stupid rules which are not practical at all , Now I am also very sure that the working group is working against the RIA MODEL and want to destroy the RIA because they might have open their own advisory company in the name of their family member or other relative and now want to shut the shop of all other advisors .

    Just because of fake Indore advisors they are tightening norms for Genuine advisors too . This is just like demonetization of RIA .

    There should be some serious action against this working group who is intentionally doing this ,otherwise they will kill RIA model completely.

  2. Hi Basa, hard-hitting article.. SEBI has done (till date) nothing to promote fee-only RIA business and top of that now coming up with illogical and idiotic guidelines (proposed) to kill independent fee-only RIA business? Its very disheartening! Hope some common-sense prevails and they come up with better ways to promote fee-only RIA business. Else, these guidelines will not only demotivate genuine Fee-only planners but also disadvantageous to general public.

  3. I understand the pain of having to face the regulatory changes.

    I am curious to understand how you arrived at a fee structure of Rs33,333 per client if somebody is serving 150 clients to meet the net worth criteria. What SEBI is asking you to have is net worth and it doesn’t mean that the net worth amount has to be collected from the clients advised. Secondly, the net worth is a one time affair.
    Your idea of collecting Rs50 lakhs from clients to meet the net worth criteria is like a promoter of a company saying that he will collect all the capital required for the business from the end user of the product!

    1. Dear Venkat,
      I think you have not noticed my point properly. When I say the accumulation of net worth, I meant it should be from the earnings of my business but not the capital to be considered from my accumulated wealth (which may be from my asset). Also, do you think SEBI will retain this net worth rule of Rs.50 lakh throughout your profession? what if after few year they introduced one more consultancy paper and forcing us to increase our net worth to Rs.1 Cr or Rs.2 Cr.

    2. Hey Venkat,

      A person having worked for say 10-15 years in the industry (as employee) with all the necessary qualifications just cannot rake up such amounts to invest in a firm with high compliance costs etc. or start his own business if he wishes to. Cause even if you are smart and experienced, you need high capital to start a business. This legislation is anti-competitive to the core. ONLY people with money can do this business. It is surprising that a service business requires high capital requirements when not needed. Experience / qualifications and hardwork be dammed. Crooks having 50-70lacs will can employ qualified people at cheap rates (since there are no jobs anyways) and do what they want. That is happening already in Indore. Basically, there are monkeys sitting inside the regulators who have no idea how to do business but want to regulated hardworking people by sitting in A/C offices in business districts.

Leave a Reply

Your email address will not be published. Required fields are marked *

For Unbiased Advice Subscribe to our Fixed Fee Only Financial Planning Service

Recent Posts