Revisiting IA regulations: Why part-time advisors may not be the answer

The latest consultation paper on IA Regulation is attempting to do a course correction by bringing down the eligibility criteria in terms of education, doing away with the experience requirement completely, and passing the certification exams just once. There are a host of other changes as well, many of them positive, that will now give the much-needed lift to the advisory profession.

However, the consultation paper has struck a few discordant notes, too, which need a relook. I would focus my attention on just one of them in this piece—Part-time Investment Adviser (IA).

There is a fundamental problem that is embedded in the initial regulation itself, where investment advice is defined as: “Investment advice means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning.”

This definition focusses on products, transaction, portfolio advice and, lastly, comes to financial planning as an after-thought. In fact, the term investment adviser itself is a misnomer as that again indicates a focus on investment products, their selection, portfolio construction, etc. 

If the intention was to provide holistic financial advice, considering the needs of the customer and their family, we should be referred to as financial planners, not investment advisers.

I have brought this up as this is connected with the part-time IA thought-process, and not holistic financial plan and advice.

In the part-time IA construct, anyone currently employed as a teacher, professor, or in education-related businesses, as well as professionals such as doctors, lawyers, and architects, or anyone employed in or pursuing an activity permitted by a financial services regulator, can become a part-time IA. This admittedly broadens the range of people eligible to become IAs.

But then, can someone who is already doing other activities or pursuing other professions or employment have the bandwidth to professionally provide investment advice, too? 

Besides, customers are yet to understand the difference between a distributor and adviser. A part-time adviser will only add to the confusion.

In the financial services field, we have always had distributors who have dealt in a range of products like insurance, bonds, fixed deposits, mutual funds, etc. However, what typically these people have been doing is product selling.

The idea of part-time advisers arose because the role of an IA is often perceived as merely providing product-level investment advice. This perception suggests that anyone, even on a part-time basis, could do it, similar to how financial services distributors sell multiple product lines.

Advisory is a different ballgame. It is a profession and we need to recognize that. In advisory, one needs to understand the client’s needs, personal situation, and their current and future cashflows, only after which an advisor comes up with a financial plan. The investment recommendations come right at the end of this process.

Advisory involves far more detailed interactions, a higher level of understanding and connect with customers, for it to work, as opposed to product selling. The knowledge and skill requirements are also higher. 

There is so much to know in the advisory area. One will develop the expertise through years of practice and experience, like with any other profession. The mindset needed here, itself is different.

Advisory is a specialized area like the legal or medical area. One cannot practice part-time in most of these professions. Why should it be different with advisory?

Now, let us look at the definition of an investment adviser: “investment adviser means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons, and includes any person who holds out himself as an investment adviser, by whatever name called.”

This means, only if a fee is charged for advice, one needs to come under IA regulation. This means, anyone can give free advice and not come under the IA regulation. Product sellers use this route. But such “advice” may be self-serving and have major implications for a customer. This loophole needs to be closed.

Also, from the Securities and Exchange Board of India (Sebi)’s point of view, part-time advisors maybe a minefield. Inducting part-time IAs has the potential to water down the advisory nature of the IA practice. 

The other problems could be creating confusion in the customer’s minds, leading to dissatisfaction and complaints.

Thoughtful corrections in the IA Regulation could, by themselves, lead to a surge in advisers across the country. However, the part-time IA approach may not be the best way to increase the advisor count and should not be pursued.

—Suresh Sadagopan is the MD & Principal Officer at Ladder7 Wealth Planners, and the author of “If God Was Your Financial Planner”.