In India, the word "investment advisor"(IA) is defined under Section 2 (1) (m) of SEBI Investment Advisors Regulations, 2013 which was notified on 21 January 2013.
An investment advisor can be:
- Body corporate (including Limited Liability Partnerships (LLPs))
- partnership firms
who, for consideration /payment (including non-cash benefits), is engaged in the business of providing investment advice to persons or group of persons
The definition includes any person who holds himself out as an investment adviser, by whatever name called.Financial Planners are also included in the definition of investment advisers.The investment advisor has to be certified by institutions like NISM, FPSB etc.
The distinction between an investment adviser and a distributor is that the formercannot obtain any remuneration or compensation from any person other than from the client being advised. Thus,in India, only the act of giving advice will be regulated under the Investment Advisors Regulation 2013, whereas the regulation of selling of products, if any, would be solely under the purview of the product regulators like IRDA, PFRDA etc.
The Investment advisor can render advice relating to investing in, purchasing, sellingor otherwise dealing in securities or investment products, and advice oninvestment portfolio containing securities (See Section 2(h) of Securities Contracts Regulation Act 1956 to understand what all instruments are covered under the word Securities) or investment products. The advice can be written, oral or through any other means of communication.
However,investment advice given through newspaper, magazines, anyelectronic or broadcasting or telecommunications medium, which is widelyavailable to the public are not considered as investment advice.
Investment advisors have to register themselves with the securities market regulator, SEBI and have to use the words "investment adviser" in their name. However no registration is required for
- Persons giving general comments relating to securities market in good faith
- Insurance agent/ brokers, pension advisers advising solely in insurance products/ pension products and is registered with IRDA/ PFRDA respectively.
- Mutual fund Distributors
- Advocates, solicitors, law firms, Members of ICAI, ICSI, ICWAI, Actuarial Society of India providing investment advice to their clients incidental to their professional service.
- SEBI-registered Stock Brokers, sub-brokers, Portfolio Managers, Merchant Bankers (However, such intermediaries have to comply with the general obligation and responsibilities provisions of the IA Regulations)
- Any other persons or entities as may be specified by SEBI.
This means that a person needs to register as an investment advisor, only if he intends to provide advice across various asset classes.
The banks/ company /body corporate which also offer distribution or execution ( which essentially means carrying out the advice on behalf of the client or the process of making investments in financial products for the clients advised upon) are required to offer investment advisory services through a subsidiary or a Separately Identifiable Department or Division (SIDD). Such a SIDD is required to be clearly segregated from other activitiesand have to make disclosures to the clients being advised, about any remuneration or compensation received by it and any of its associates for the distribution or execution services.Banks and NBFCs need to obtain prior permission from RBI before acting as investment advisors.
The Investment advisor is required to abide by the code of conduct, fiduciary duties, record keeping, and do the risk profiling of the clients and also deal with the issue of suitability and appropriateness of the advice.
Obligations and Responsibilities of investment advisors
- act in a fiduciary capacity and the interest of its clients
- not divulge any confidential information
- abide by Code of Conduct as specified
- conduct risks profiling and risk assessment of the investor
- ensure investments should be suitable and appropriate to the risk profile of the client
- maintain written records for a period of 5 years
- conduct yearly audit in respect of compliance with regulation;Body corporates to appoint a compliance officer
- maintain proper system and procedure for redressing grievances of clients.
It is unlawful for any investment Adviser to employ any device or scheme to defraud any client or prospective client.