Setting up an RIA Practice

While SEBI’s RIA Regulations 2013 marked the beginning of fiduciary services in investment advisory business in India, it lacked the teeth to create an impact. SEBI’s gazette notification on 3rd July 2020 along with the minutes of meeting published on SEBI’s website has given clear guidelines for the future of advisory business in India. All intermediaries now need to decide the path that they will take in future.

ARIA represents SEBI Registered Investment Advisers and is committed towards the growth of this practice in India. The purpose of this section is to provide guidelines to aspiring RIAs to create / convert their existing distribution practice to a SEBI compliant advisory practice. There are different models of RIA practice that are feasible under current regulations which gives enough room to all who want to become RIAs, but not compromise on their existing revenue stream. RIAs can have pure fee practice or hybrid practice with client level segregation or commission only practice.

Legal and Procedural Steps

We have enumerated the steps to be taken to create / convert the existing distribution business to RIA practice.

    1. Check if you qualify to apply for the RIA license.
      1. Qualifications
      2. Experience
      3. Capital Adequacy

      For specific details, please refer to the link below:
      https://www.sebi.gov.in/legal/regulations/jan-2013/securities-and-exchange-board-of-india-investment-advisers-regulations-2013-last-amended-on-july-03-2020-_34619.html

    2. Choose if you want to apply for individual or corporate license.
    3. Choose an organisational structure for your practice.
      1. Proprietorship
      2. OPC
      3. LLP
      4. Pvt Ltd
    4. Create a business plan which should include among other things sources of revenue and expenses involved.
    5. Apply to SEBI in the prescribed form along with prescribed fees. The Applicant for grant of registration as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013 should make an application to SEBI in Form A as provided in the Regulations along with all the necessary supporting documents.Link: https://www.sebi.gov.in/acts/formcent.pdf
    6. Ensure processes and organise the tools in your organisation. This is a broad outline of tools and may differ for corporate and individual RIAs and from one RIA to other.
      1. Client service agreements as prescribed by SEBI
      2. Risk profiling tools
      3. Financial planning tools /software
      4. Client management systems / software
      5. Access to transaction platform
      6. Investment management tools and software
      7. Front office and back office staff along with a compliance officer
    7. If an existing distribution business is being converted into RIA practice, client level segregation should be implemented.
      1. RIA cannot charge fees to a ‘distribution client’
      2. RIA cannot earn commissions from a ‘fee paying client’
      3. Classify all the clients into two categories – Fee or Commissions.
      4. Have clearly defined processes for both
      5. Communicate to clients about this classification.

Pointers on Conversion from Distribution Business to Advisory Practice

Underlying difference between two practices

 

 

Advisor as well as the distributor acts as an intermediary between the product manufacturer and investor. But the two of them perform quite different functions. In the past there was no legal differentiation between an advisor and a distributor, but the new regulations have removed this ambiguity.

Distributor

  1. Advising skills are most important.
  2. Essentially a consulting job where execution is incidental.
  3. Problem solving approach.
  4. Source of revenue is fee collected from client.

Distributor

  1. Marketing skills are most important.
  2. Essentially a sales job where suitability of product is incidental.
  3. Product sales approach.
  4. Source of revenue is commissions received from manufacturer.

ARIA is committed to growing the RIA industry in India. Board members and volunteers will be more than happy to mentor and guide the aspiring RIAs. You can reach out to them @ aria.india1@gmail.com