Think You’re Ready to become an Investment Adviser? Not Without These 9 Rules

Becoming a SEBI-certified investment adviser demands mastering key regulations that ensure client trust and financial integrity.

Mon Nov 4, 2024

Navigating the world of investments requires more than just knowledge; it demands adherence to strict regulations.

If you're ready to become an investment adviser, these nine crucial rules will guide your path to success.

1. Client Segregation

Investment advisers are required to separate advisory services from distribution services at the client level based on the client's Permanent Account Number (PAN). This means that existing clients must decide to receive either advisory or distribution services but cannot receive both simultaneously from the same adviser. This approach helps ensure that conflicts of interest are minimized and that clients receive unbiased advice.

2. Agreement with Client

Before providing any investment advice or charging fees, advisers must enter into a formal investment advisory agreement with their clients. This document outlines all terms and conditions of the advisory service, ensuring transparency and mutual understanding. Key components of the agreement include:

Scope of Services: Describes the advisory services provided.
Fee Structure: Specifies the fees and payment terms, following SEBI’s fee caps.
Risk Disclosure: Highlights the potential risks of investments and the advisor’s role.
Client Rights and Responsibilities: Defines client expectations and responsibilities.
Conflict of Interest Disclosure: States any potential conflicts of interest and ensures unbiased advice.

3. Fee Structure

Assets Under Advice (AUA) Model

Advisors charge a fee based on a percentage of the client’s assets under advice.
Fee Cap: Maximum of 2.5% per annum of the AUA per client across all services.
Advisors must disclose and calculate the fee based on the actual AUA for each client.

Fixed Fee Model

Advisors charge a fixed amount for their services, regardless of the client's asset size.
Fee Cap: Maximum of INR 1.25 lakh per annum per client across all services.

4. Qualifications and Certifications

Educational Qualifications:

A professional qualification or post-graduate degree in finance, accountancy, business management, commerce, economics, capital markets, banking, insurance, or actuarial science.
Alternatively, a graduate degree in any discipline, along with five years of experience in activities related to advice in financial products or securities or fund/asset/portfolio management.

Certification:
All registered advisers, including their partners and representatives, must continuously meet the qualification and certification standards per Regulation 7, which includes NISM-Series-X-A and NISM-Series-X-B certifications.

5. Non-Individual Investment Adviser Registration

Client Limit: Individual IAs must apply for non-individual registration upon reaching 150 clients (as per Regulation 13(e)).
Application Process: Submit FORM-A with the required fee. SEBI will assess based on IA regulations and circulars.
Onboarding Freeze: After reaching 150 clients, individual IAs cannot onboard new clients until granted non-individual registration, but may continue servicing existing ones.
Existing IAs with 150+ Clients (as of Sept 30, 2020): Must apply for non-individual registration by April 1, 2021, and can continue servicing current clients during SEBI’s review.

6. Record Maintenance

The Record Maintenance guideline requires SEBI-registered investment advisors to maintain detailed records of their advisory activities to ensure transparency and accountability. Key points include:

Types of Records: Advisors must keep records of client agreements, investment advice provided, fee receipts, and communications with clients.
Retention Period: Records must be preserved for at least five years, even after the client relationship ends.
Digital and Physical Storage: Records can be maintained electronically or physically but should be easily accessible for audits and inspections.

7. Annual Audit

Annual Compliance Audit: IAs must complete an annual audit for compliance with IA regulations and SEBI circulars within six months after the financial year ends.
Reporting Adverse Findings: Any adverse findings, along with actions taken, must be reported to SEBI (based on the IA’s registered address) within one month of the audit report, and no later than October 31 each year, starting from the financial year ending March 31, 2021

8. Risk Profiling for Individual & Non-Individual Clients

Assessment of Risk Tolerance: Advisors must gather information on each client's financial situation, investment goals, and risk appetite.
Custom Risk Profiles: Both individual and non-individual clients should receive a customized risk profile to guide investment recommendations.
Documented Process: Advisors should document the risk profiling process, including any risk assessment tools or questionnaires used.

9. Display of Information

To enhance transparency, IAs must prominently display the following on their website, app, printed/electronic materials, KYC forms, client agreements, and other client communications:

Full name as registered with SEBI
Type of registration (Individual or Non-Individual)
Registration number and validity
Complete address and telephone numbers
Principal Officer’s contact details (phone, email)
Corresponding SEBI regional/local office address

This helps clients easily verify the advisor’s credentials and contact information.

Key Responsibilities of Investment Advisors

As per SEBI (Investment Advisers) Regulations, 2013, investment advisors are expected to follow a set of responsibilities to ensure ethical practices, client trust, and regulatory compliance.

Here are the core responsibilities of Investment Advisors:

Fiduciary Duty: Act in the client’s best interest and disclose conflicts of interest.
No Third-Party Compensation: Receive fees only from clients, not from product providers.
Maintain Independence: Keep advisory activities separate from other business activities.
Segregation of Services: Clearly separate advisory services from other services offered.
Conflict Disclosure: Inform clients of any potential conflicts of interest.
Confidentiality: Protect client information; disclose only if legally required.
Personal Transactions: Avoid personal transactions contrary to client advice within 15 days, unless the client is informed of changed circumstances 24 hours in advance.
Know Your Client (KYC): Follow SEBI’s KYC procedures for all clients.
Code of Conduct: Adhere to SEBI’s specified Code of Conduct.
No Self-Dealings: Avoid buying from or selling securities to clients on own account.

A Golden Opportunity in Investment Guidance!

India boasts a massive population of 145 crore, which reflects a growing interest in investments. Approximately 16.2 crore demat accounts are currently active, indicating a surge in investor engagement. However, there are only 943 registered investment advisers serving this vast audience, which means that just 0.000065% of the population is connected to these vital financial guides. This presents a unique niche opportunity for those looking to make a difference. Now is the time to seize this rare chance to influence the future of investment guidance and help countless individuals achieve their financial success!

For more insights, check out our NISM X-A & NISM X-B (Investment Adviser) courses.

Explore more insightful content on Daanik Blogs.

Daanik

Daanik is a leading platform dedicated to empowering individuals with financial literacy, offering courses that help traders and investors build the skills needed to navigate the complexities of the market successfully.

Think You’re Ready to become an Investment Adviser? Not Without These 9 Rules

Key Responsibilities of Investment Advisors

You may also be interested in