Study: 95% of investment advisers fined by SEBI make trading calls

 Study: 95% of investment advisers fined by SEBI make trading calls

The majority of registered investment advisers, according to a study of SEBI orders against them over the years, simply provide calls and suggestions for speculative trading and stock derivatives; 51 percent of the orders were issued against companies from Indore, which is notorious for its spam equities phone calls.

The majority of violators (51 percent) of the 78 SEBI orders came from Madhya Pradesh, according to a breakdown of the 78 orders. 32 orders were also issued against Indore-based individuals or organizations.

According to the Association of Registered Investment Advisers (ARIA), 95 percent of the enforcement actions imposed by capital market regulator Securities and Exchange Board of India (SEBI) concern investment advisers (people and businesses who offer trading calls). In other words, only 5% of the orders are for advisors who offer comprehensive financial guidance. According to ARIA, this provides a strong argument in favor of relaxing the stringent rules that many investment advisors attribute to the slow expansion of registered investment advisers (RIA) in India.

The SEBI has consistently fined offenders ever since it released its Investment Advisers regulations in 2013 (and modified them in 2020, following four rounds of comment papers).

From the start of the regulations in January 2013 to June 14, 2023, the regulator issued 78 major orders against investment advisers. An study of those orders shows that 74 of them were issued against unregistered firms and 22 were issued against registered entities. It was discovered that the majority of the orders referred to companies that offered their clients trading calls. The issue with unregistered investment advisers was worse because almost all of them were found to be giving trade calls.

A trade call provided by an investment adviser is currently not defined in any formal documents. ARIA defines a trading call provider as someone who offers guidance on non-delivery transactions, equities intraday, derivatives, leveraged trading, and other topics in order to make things clearer. Simply put, a provider of trading calls offers recommendations on speculative trading as opposed to long-term financial investments and goal-based financial planning.

The majority of violators (51 percent) of the 78 SEBI orders came from Madhya Pradesh, according to a breakdown of the 78 orders. 32 orders were also issued against Indore-based individuals or organizations.

Despite being one of the cleanest towns in India, Indore has developed a terrible reputation as a haven for stock tippers and speculative traders who have encouraged numerous unknowing and untrained individuals to engage in speculative trading and incur losses. After Indore, Bengaluru, Madurai, Surat, Ahmedabad, and Mumbai are where the majority of defaulters may be located.

What percentage of RIAs are not in compliance?

Investor concerns are currently accepted by SEBI through SCORES, its complaint process. 78 percent of the 918 RIAs in the industry, according to ARIA's data, have not received any investor complaints at SEBI.

The survey discovered that 9% of RIAs have 10 or more complaints, and that this subset of RIAs is responsible for 94% of the total (4,999) complaints. "It appears that all of these entities are 'Trading Call Providers' based on their names and other information about them.

A further analysis of SEBI orders against these violators reveals that the bulk of them were penalized for their equity and derivative recommendations, aside from the tiny number of RIAs that make up the majority of the complaints. Only one of the 22 SEBI orders against RIAs contained a complaint about mutual funds. Due to equities and derivative recommendations (speculative trading calls) that probably went bad for their clients, the remainder were hauled up.

Equity and derivatives were at the center of every SEBI conviction against an unregistered entity. According to this examination of investor concerns, RIAs that are not "Trading Call Providers" need to be handled differently because of their activity, the research said.

Getting rid of the trading call providers

The RIA community has been clamoring to exempt stock tippers from RIA regulations and maybe change the onerous compliance standards to more strictly regulate that group. "It's entirely OK for financial planners to fall under the purview of investment advice regulations, primarily in order to rake in fees. However, this group of professionals differs greatly from those that only provide stock recommendations and derivatives methods, which are intended to generate quick and frequently speculative profits. The current Investment Advisory Regulations need to be modified to provide qualified financial planners with a more lenient set of rules. And speaking of trade call providers, impose onerous rules and compliance requirements on them individually in order to properly restrain their actions. According to this report, the majority of SEBI orders have successfully targeted trade call providers, according to Kalpesh Ashar, founder of Full Circle Financial Planners and Advisors.

One such restriction is the requirement to pass the exam once every three years in order to keep the RIA license, as many RIAs point out. The number of clients that a single adviser may accept is the second condition that several RIAs have sought for a review of. In accordance with SEBI RIA standards, individual advisers are now limited to 150 clients. "It doesn't really make sense to limit the total number of clients that a single RIA can have to 150. In our experience, many individual financial advisors are able to serve more than 150 clients. It's possible if these advisers have teams working for them, according to an RIA who requested anonymity.

The development of a safe place is a controversial policy that is soon to be implemented. The SEBI has been developing a system that will only allow customers of advisers to pay advice fees through registered portals. The advisor would subsequently receive payment for the fees. Although the specific payment process is still unknown, it appears that the fees would now be filtered through an intermediary layer rather than going directly from the client's bank account to the adviser's bank account. One of the goals is for SEBI to monitor the fees that clients pay to their advisors and take action if the prices are excessive. "SEBI's proposal of a safe space will not really solve the problem," claims Dilshad Billimoria, director and chief financial planner at Dilzer Consultants Pvt Ltd. Unregistered advisers will continue to operate outside the scope of SEBI's laws.