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Registered Investment Advisor (RIA): All you need to know

[ecis2016.org] RIA, full form of which is Registered Investment Advisor, refers to an individual or organisation that counsels private clients such as high net worth individuals on investments.

RIA full form is Registered Investment Advisor. It is an individual or organisation that counsels private clients on their financial investments. RIAs owe loyalty and trust to their customers, known as a fiduciary obligation, to provide them with the best financial advice.

The Securities and Exchange Board of India (SEBI), India’s primary market regulator, is the organisation that RIAs must register with. In comparison to distributors of mutual funds, they are held to a higher standard of responsibility towards their clients.

RIAs create a financial strategy for their clients based on their objectives, resources, and present financial condition. Their services are normally charged monthly or annually.

Who must register as a Registered Investment Advisor?

Investment advisors have to register with the Securities and Exchange Commission if they are involved in a business that offers investment advice to anybody for consideration. Anyone may apply to become a Registered Investment Advisor (RIA) in India, including individuals, single proprietorships, partnership firms and corporations. Advisors must register with SEBI if their customer base surpasses 150 individuals. 

In contrast, the following entities are not required to be registered with SEBI:

  • IRDA-registered brokers and representatives of insurance
  • PFRDA-registered financial planners
  • AMFI-registered distributors of mutual funds who are able to give customers basic guidance in the course of their distribution work.
  • People who belong to the Indian institutes for company secrecy, cost-and-works accounting or chartered accounting and are able to advise customers as a side benefit of their employment.

SEBI rules for a Registered Investment Advisor (RIA)

Securities and Exchange Board of India (SEBI) enacted an investment adviser regulation in 2013. SEBI dictates the terms and conditions of registration along with the qualifications and guidelines for who is eligible for what services and how much a company may charge a customer for these services. It has been SEBI’s goal to improve investor trust and boost accountability in investment advising services by often changing the regulations for Registered Investment Advisers (RIAs). The following are the guidelines for establishing an RIA.

Eligibility requirements

It is necessary for registered investment advisors, partnership firms, businesses, and limited liability partnerships to have a net worth that qualifies for the role of an investment adviser. The standards for a candidate’s net worth have been recently revised by SEBI in July 2020, and the new rules came into effect on October 1st, 2020. In addition, the requirements should be met by all financial advisers for investments within three years.

The minimum amount of net worth required for a person is INR 5 lakh. Before the amendment, the minimum required net worth was 1 lakh INR.

It is required that a partnership company have a minimum net worth of INR 50 lakhs. Before the restrictions were changed, the minimum required net worth was INR1 lakh.

The minimum required net worth for firms, body corporations, and LLPs is INR 50 lakhs. Prior to the modification, it had been set at INR 25 lakhs.

Qualification

One must possess each of the following credentials in order to become a registered advisor:

  • A professional qualification, a postgraduate degree, or a postgraduate specialisation in finance, business administration, banking, capital market, accounting, economics, commerce,  or insurance, together with five years of experience is required.
  • A level 2 certification from the NISM.
  • Prior to the July 2020 modification, a professional qualification, a postgraduate degree, or five years of experience in any field of study were required.

Become a registered investment advisor

To become a SEBI RIA, you must submit an application to SEBI using Form A. The following papers must be included with the Form A.

  • Identity, address, and qualification documents
  • Experience certifications
  • CIBIL Score
  • Certificate of net worth from Chartered Accountants
  • Previous three years of tax returns
  • Application fees
  • Any further declarations necessary

Registration charges of INR 5,000 are required for a person or partnership company to become a registered investment adviser. Others must pay INR 25,000 in fees. 

Agreements between RIAs and their clients

In order to ensure openness, SEBI-registered investment advisers have a contract for investment advising services. The structure of the agreement is not required by SEBI, but the terms, recommendations, and conditions are.

Clients will be charged fees

To guarantee that SEBI-registered investment advisers get acceptable fees, SEBI has outlined a fee-charging structure. Prior to the revisions, SEBI did not control the structure of fees. The two fee structure suggestions are:

  1. An annual charge of 2.5% of Assets under Advice (AUA) each family
  2. An annual cost of INR 75,000 each household

Determining the specifics of RIA

It is the SEBI’s job to oversee the country’s stock market and its financial services industry. Only investment advisers registered with the Securities and Exchange Board of India (SEBI) may advise investors and customers on financial instruments. However, the RIA requirements must be followed by financial advisers.

According to a mandate issued by SEBI, registered investment advisors are required to constantly and unequivocally put their client’s interests above their interests. The obligation of the investment advisor must be adhered to at all times, regardless of the circumstances.

Registered Investment Advisors should also inform their customers of any possible collusion. They must adhere to high ethical standards in all commercial operations. Some RIAs bill their customers for a fee that is calculated as a percentage of the assets they manage. Some people charge a set cost for guidance while others bill by the hour.

The SEBI RIA takes on various responsibilities including those of financial adviser, asset manager, and tax savings counsellor. The effective planning of taxes assists with the filing of income tax returns and some investments help reduce the amount of tax that must be paid. These deductions may be claimed on the individual’s tax return.

Ongoing responsibilities of a SEBI-registered investment consultant

When offering recommendations to clients, RIAs must adhere to a set of processes and standards. It entails detecting any potential conflicts or dangers associated with a transaction and guaranteeing that the customer is aware of them.

When a customer inquires about an investment’s appropriateness, the RIA must disclose the screening process. The identification of the asset, risk mitigation techniques, and proof of the asset’s appropriateness are parts of the process.

Paperwork is critical from a regulatory standpoint. In the case of an examination by the Securities and Exchange Board of India (SEBI), the entire paperwork of the financial strategy is required. It also requires evidence from the client demonstrating an understanding of their investment strategy and tolerance for risk.

RIA fees

Generally, there are two kinds of fees that RIAs often charge their consumers:

Percentage of assets

This is analogous to the trail commission that is associated with mutual funds. The sole distinction is that this charge is taken directly from the customer rather than through the fund house. In most cases, the charges amount to 1 percent of the assets, but as the investment portfolio grows, the cost decreases.

Flat fee 

This is a one-time annual charge. It is determined by the investor and the adviser coming to a consensus on it.

India’s Registered Investment Advisor (RIA) competitors

Advisors come in a variety of forms, and each performs their duties in a unique manner. RIAs face direct competition from these entities and individuals.

  • Mutual-fund firms
  • Hedge funds
  • Investment banks (wirehouses) 
  • Brokers that serve to DIY investors

What are the advantages of working with a SEBI-registered investment advisor?

SEBI RIAs have the necessary qualifications to guarantee that consumers get high-quality advice. They verify that the financial advice is appropriate and do a risk assessment in accordance with the standards.

To their customers, RIAs owe allegiance of loyalty and care known as fiduciary responsibility. They clear any conflict of interest as soon as they occur. The implementation and investment advising services are also segregated to avoid conflicts of interest. As a result, the process of financial counselling becomes transparent.

Source: https://ecis2016.org/.
Copyright belongs to: ecis2016.org

Debora Berti

Università degli Studi di Firenze, IT

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