At the outset, I would like to thank all of you for your encouraging feedback on my recent posts Demystifying RIA / MFD Regulations and way forward for MFDs and RIAs.
A lot of MFD and RIA friends, well-wishers and industry players asked me to create a follow-up document on FAQs for mutual fund distributors (MFDs), Registered Investment Advisers (RIAs) and MFDs willing to transition to RIAs to provide further clarity.
I have tried my best to cover every possible question that I could think of or I have come across in one or the other conversations or it was asked by some intermediaries to us. We have used our interpretation while giving answers to the questions.
I hope this shall bring more clarity on the subject.
FAQs by existing mutual fund distributor
Can MFD provide financial planning or discuss goal planning service with my clients?
No, the same will be considered as investment advice for which you need to be an RIA.
Can I use words like adviser, wealth manager, planner or similar names along with my name or in my company name?
No, an MFD has to abstain from using any such nomenclatures which describes one as providing financial or investment advice.
I am an MFD and have done CFP; can I use the salutation CFP with my name?
Yes, you can use the salutation but you cannot provide advice to clients.
Can I continue with the insurance business and earn commissions?
Yes.
Can I continue distributing services like estate planning, NPS, FD, loans, etc and get commissions?
Yes.
What is incidental advice?
MFD can sell a scheme to a client and in this process can check the appropriateness of the scheme to the client by doing his risk profiling and explaining product features, facts and risks of the scheme to the client. Incidental activity is always considered as a minor accompaniment to core activity.
Will financial planning, goal planning, or doing asset allocation be considered as an incidental activity?
No, financial planning, goal planning, or asset allocation are part of the definition of investment advice and will not be considered as Incidental activity.
If I become RIA will I get trail commission on my existing AUM?
Yes, you will continue to get trail commission on your existing business. If you become Individual IA then any new business has to be done in direct plan only and if you become a corporate RIA then you can do new business in regular plan or direct plan with segregation at a client level.
Can I be an individual ARN holder and also Director in a company that applies for RIA or I am a director in a company that has ARN and I want to apply as Individual RIA?
No, SEBI will look at this as a conflict of interest.
Can anyone else in my family be an MFD and I can be an RIA or I am an MFD and anyone in the family becomes RIA?
Yes, you can do that but the same client cannot be serviced by both of the family members at the same time. Client will either be in an advisory or in distribution.
I am not a PG but want to become an RIA?
Apply under Corporate RIA by appointing a Principal Officer who can be the head of the IA division.
I want to do goal planning or asset allocation for my clients but do not comply with some or all of the eligibility criteria, what should I do?
Join or refer clients to an existing RIA firm or join Infrastructure Company.
Can my website have financial calculators?
Yes, as long as you are not advising clients.
Can I make videos on investments and send to clients?
Yes, as long as those videos do not have the advice angle in it.
I would like to have both RIA and ARN license to give both types of services to my clients?
Become a corporate RIA.
But corporate RIA has a large net worth, license cost, compliance, etc.?
Collaborate amongst your peers or join an Infrastructure Company.
What happens to my existing financial plans or goals that I have created for my clients?
You have to become RIA or use other RIA services to continue to service planned goals for your clients.
Can I rebalance client portfolios if the market goes up or down or if asset allocation or risk profile of client changes?
No, you need to be an RIA to give advice to clients. So either you become RIA or join another RIA or collaborate amongst peers and be corporate RIA or join Infrastructure Company.
What are the consequences of violation of SEBI guidelines?
AMFI or SEBI may suspend/blacklist ARN and that could jeopardize the trail commission and put the entire practice, brand at risk.
SEBI will not catch violations for years or SEBI or AMFI will not come to me or my office, I don’t fall into Distributor Due Diligence, why should I worry?
MFDs falling under DDD: Violations may be caught during year- end SEBI audit, what if client or rival or competition or even current or ex disgruntled employee complaints?
MFDs not falling under DDD: Today you are not in DDD. Tomorrow? Self-regulatory organization (SRO) will regulate MFDs. Cost of non-compliance is much more than cost of compliance.
FAQs by existing Investment Advisers
If I cross 150 clients when do I have to register for non-individual IA?
Within 6 months from the date of the trigger.
From which date are the new rules applicable?
October 1, 2020.
I have portfolios with regular plans which I cannot switch to direct as they are locked in or has a cost to redeem, what should I do?
You can continue to have them in client portfolios, disclose to clients if any remuneration is received and record the rational.
Can I provide insurance or any other services like estate, bonds, PMS, P2P, etc, and get commissions?
Yes, you can provide all such services wherever direct is not available but you need to record and disclose to client the remuneration and the rational.
I am corporate RIA; can I charge for financial planning and earn commissions from the same client?
No, client level segregation needs to be maintained (1 Client = 1 Client and 1 source of revenue).
How much time I have for complying with new guidelines qualification and net worth?
3 years.
Is the limit of 150 clients are for family or individuals?
Individual clients for whom the investment process is undertaken
I want to charge a fixed amount for one time financial planning and % for monitoring, tracking the portfolio?
Only 1 fee type can be charged - either fixed amount or % of AUA.
SEBI is yet to clarify on few open items like the definition of the number of clients, the process to monitor segregation of activities, the process for conversion from 1 entity to another, terms of the agreement, fee structure. But all these points are discussed or touched upon either in consultation paper or board minutes.
FAQs by existing MFDs thinking of becoming RIA
What is the cost of getting the IA license?
Rs 15,000 for individuals or Rs 5.25 lakh for non-individuals with a validity of five years.
What is the cost of compliance?
Generally, in the range of Rs 2,000 - 5,000 per month depending upon your size of business.
What all compliances have to be followed?
Maintaining all records like RP, Suitability, Rational, Agreements, Disclosures, KYC documents, Investment process, etc and follow Code of Conduct.
How much net worth I need to have?
Individual Rs 5 lakh and non-individual Rs 50 lakh.
Licensing is one time or recurring?
Licensing needs to be renewed every 5 years, yearly audit.
Is CFP sufficient to apply for RIA?
CFP will suffice the certification requirement; you need to still have qualification, experience and networth to suffice all criteria.
Post graduate, net worth, fee recovery, compliance are the biggest roadblocks for becoming IA. What should I do?
Join an existing RIA or Infrastructure Company
If you think I have missed answering any more questions, feel free to send an email and we will try and answer that within the given guidelines and clarity provided basis our understanding.
I can be reached at aakash.bansal@mercuryfinancial.co.in
