SEBI’s Concept Paper on Regulation on Investment Advisors

Query: Your feedback on SEBI’s Concept Paper on Regulation on Investment Advisors?

Mr. Gerard Colaco: My preliminary views are as follows. It was only a matter of time before investment advisers had to be regulated in India. There has been too much wrong advising and mis-selling. But what SEBI has not realised is that the main damage to investors is done by stock brokers and insurance agents, both of whom will escape the regulation on investment advisers.

No investor can lose more than her invested principal in a mutual fund. But they certainly can do so trading derivatives. Similarly, the most aggressively sold insurance products are the investment-linked insurance products, which are referred to by insurance people themselves as "poor-insurance, poor-investment products," thereby serving neither insurance nor investment needs.

I wonder why SEBI does not want stock brokers and sub-brokers to risk profile and maintain detailed records for five years of their tips, 'advice' and derivatives strategies for individual investors?! Is there some 'conflict of interest' here?

As mentioned earlier, from what I could see, both stock brokers (and sub-brokers) and insurance agents have been excluded from these regulations. So, there could be a greater shift to areas like insurance and the business of acting as sub-brokers to stock-brokers.

The category of persons who will be hardest hit by the proposed regulations will probably be the CFPs who wanted to establish fee-only practices. This is a concept that is alien to the Indian environment. Numerous workshops have been conducted by a variety of consultants on how mutual fund distributors must move from a commission-based system to a fee-based system. However, the only movement I have seen has been from areas of greater regulation and lower income to areas of lesser regulation and higher income.

Most mutual fund distributors may find it convenient to call themselves agents after this and abandon any pretence towards advisory services.

Where we are concerned, no client comes to us because of what we call ourselves. They come to us because of what we are. Also no one can prevent us from giving advice or opinions if we do not charge for them. We can easily restrict ourselves to giving advice only to such individuals who will route business through us. This is what we have been doing to a very great extent in any case and our revenues from such madness have been quite satisfactory.

Our elimination of conflicts of interest is based on our high standards of ethics, not on some regulatory clauses. I do not think I would like to function as an investment adviser when the term 'investment adviser' is defined by SEBI. I would not like to place myself in some investment advisory straightjacket, especially if it conflicts with the advice given by the world’s finest authorities on investment, none of whom will ever be found at NISM!

In fact you can be sure that most NISM-produced courses and material will originate from armchair academics and will be superficial, shallow and unrelated to life. I would be willing to bet my last devalued Indian rupee that none of these worthies have even five years of continuous experience in taking care of actual flesh-and-blood investors.

We will wait until the consultations are over and the regulations are out in their final form, before we fine-tune our business strategies if required and to the extent required. Right now, we remain alert but unworried, as usual. My co-conspirators at Colaco & Aranha and I believe in embracing change, not avoiding it. The days ahead should be entertaining!