Thus, in order to correct this anomaly and crack its whip on investment advisors indulging in unfair trade practices, the capital market regulator- Securities and Exchange Board of India (SEBI) has put in place strict norms for investment advisors. Post implementation of the SEBI's stricter norms, all investment advisors would need to register with SEBI (Securities and Exchange Board of India) after payment of required application and registration fees. Going forward, SEBI eventually wants them (investment advisors) to be regulated through a SRO (Self-Regulatory Organisation) model.
Under the proposed norms the investment advisers would be under strict vigil for any front-running, a phrase used in market parlance for trading in stocks based on prior information about trades to be conducted by a fund manager . Moreover, to address any conflict of interest, investment advisers would be required to segregate other businesses from their activity as an investment adviser and disclose all commission and rewards that they receive from their clients. Some of the other guidelines which the investment advisors need to follow are:
Investment advisers may charge fees subject to the ceiling specified by SEBI Disclose conflicts of interest arising from any association with a product provider Disclose to the investor the holding or position (of investment advisors), if any, in the financial product which is subject matter of recommendation Fair treatment of clients in case of unavoidable conflicts of interests Abide by a Code of Conduct and conduct risks profiling and risk Assessment of the investor Maintain written records relating to investment advisory services for a period of five years and conduct yearly audit in respect of compliance with regulation. Cannot employ any device or scheme to defraud any client or prospective client We are of the view that, SEBI has taken a step in the right direction by reining the investment advisors. Such steps by the SEBI will infuse confidence in the minds of investors and given the right advice based on each investors' respective risk appetite will help investors to benefit from their investments in mutual fund schemes. Moreover, the mutual fund industry too, will be able to achieve financial inclusion. Despite these steps to improve the advice provided by the investment advisors, investors should act responsibly and do a little homework before having a blind-fold faith on the investment advisors.
PersonalFN is a Mumbai based Financial Planning and Mutual Fund Research Firm
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