Investment advisory: Piece of advice, peace of mind

Feb 10 2014, 14:17 IST
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Sebi's regulation allows MF distributors, CAs etc to provide investment advice to their clients incidental to their primary activity. Sebi's regulation allows MF distributors, CAs etc to provide investment advice to their clients incidental to their primary activity.
SummaryA look at how Sebi is working to free investment advisory space as it tries to win over investors.

A look at how the market regulator is working to free the investment advisory space from conflict of interest and mis-selling, as it tries to win over investors:

UK Sinha, chairman of the Securities and Exchange Board of India (Sebi) last week got a two-year extention as Sebi chief. Sinha has been working on many issues, and one of them is to build retail investors’ trust in the market and provide the desired handholding in terms of financial advisory being offered to them.

The regulator himself has been raking up the issue of building trust among investors and has made efforts to rid the investment advisory space free of conflicts of interest and mis-selling so that the consumers’ interests are protected and they get the best advice based on their risk profile. While a lot has been done on this front, there is still a lot more ground to be covered.

While the investment advisor regulation became a reality in 2013 where the regulator differentiated between an adviser and a distributor — demarcated their roles within the regulations — it is still in the process of evolution and has to take off.

The issues around financial advisory and distribution surfaced in line with the growth in markets. As the financial markets rose sharply in the five-year period between 2003 and 2007, sales of financial products such as mutual funds, insurance products etc gained momentum and with them came rising instances of mis-selling and other bad practices. While such practices became an issue of discussion at several forums it also drew the regulator’s attention.

Steps taken by regulators in the past

Questions were raised on the role of agents and distributors as to whose interest were they serving since they were earning revenues both from the product manufacturer (in the form of commissions) and from the investors (in the form of advisory fee or other charges) too. Also there were questions on whether they were offering the best product to the consumer or their decision to pitch a product was based on commission being offered by the product manufacturers.

Sebi took a decision in 2009 to ban entry load on mutual funds thereby bringing in an advisory fee regime where the investor would decide on the fee to be paid to the distributor based on the service offered.

Later the capital markets regulator thought of clearly defining the roles of distributor and advisor.


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