SEBI Cracks Down On Unregistered Investment Advisers

While there may be a few individuals offering objective and reliable advice, there is a higher proportion of influencers, about seven out of ten, who may be motivated by factors other than the investors’ best interests. This has been leading to financial frauds and advice that harms the investment plans of those who want to participate in the equity market. As such, SEBI’s red flag has come at the right time. But will this move be truly beneficial for those who are complying with the regulations? This special report by Bhavya Rathod takes a deeper look at the situation. 

The Securities and Exchange Board of India (SEBI) has been cracking down on unregistered investment advisers in recent years. In fact, over the last one month, a few well-known unregistered investment advisers have faced penalties, suggesting that this could be the beginning of a regulatory crackdown by SEBI on individuals offering financial advice without proper registration. Recently, Finance Minister Nirmala Sitharaman also acknowledged the concerns regarding financial influencers in India and cautioned about the risks associated with Ponzi apps that claim to provide financial solutions. 

While there is currently no proposal to regulate these financial influencers, she emphasised the importance of exercising caution. The minister highlighted that while there may be a few individuals offering objective and reliable advice, there is a higher proportion of influencers, about seven out of ten, who may be motivated by factors other than the investors’ best interests. 

SEBI’s crackdown on unregistered investment advisers has been met with a mixed response. Some investors have welcomed the move, while others have expressed concerns that it could stifle innovation in the financial services industry. 

Nevertheless, the benefits of SEBI’s crackdown on unregistered investment advisers outweigh any potential drawbacks. By cracking down on unregistered investment advisers, SEBI is helping to protect investors from frauds and ensure that they receive sound financial advice. This is a positive development and we believe that it will help to promote the growth of the Indian securities market in the long run. There are various reasons why we appreciate SEBI’s actions against unregistered investment advisers, one of them being that these are in the interest of the overall investment landscape. Some of the other reasons are outlined below: 

Investor Protection — SEBI’s regulatory measures play a crucial role in protecting the welfare of investors. Unregistered advisors, who might lack the essential qualifications, experience or commitment to ethical standards needed for trustworthy financial guidance, are targeted by SEBI’s crackdown. Through these actions, SEBI mitigates the likelihood of investors becoming prey to fraudulent schemes, misrepresentation of investment prospects or inadequate financial advice that could lead to significant monetary setbacks. 

Enhancing Market Integrity — SEBI’s efforts to combat unregistered advisors uphold the integrity and reliability of the financial market. By enforcing strict regulations that permit only qualified and registered experts to offer investment advice, SEBI effectively diminishes the risks of market manipulation, fraudulent practices and the proliferation of unauthorised schemes. This commitment to creating a fair and transparent market environment fosters investor confidence and trust in the system. 

Promoting Professionalism and Expertise — SEBI’s rigorous enforcement highlights the significance of professionalism and expertise within the financial advisory sector. Through the establishment of regulatory benchmarks for qualifications, experience and ethical behaviour, SEBI motivates advisors to improve their capabilities and knowledge. As a result, the industry can elevate its level of professionalism, guaranteeing that investors receive informed and reliable financial guidance from duly qualified individuals. 

Encouraging Compliance and Accountability — The stringent measures against unregistered advisors effectively convey the significance of compliance and accountability in the financial services industry. SEBI’s punitive actions towards those operating outside the regulatory framework serve as a powerful deterrent against unethical practices. This proactive approach encourages individuals and firms to adhere to the required registration procedures and comply with regulatory guidelines, promoting a culture of responsibility and accountability in the sector. 

Strengthening Investor Confidence — SEBI’s measures against unregistered advisors play a pivotal role in enhancing investor confidence. By demonstrating proactive market surveillance and taking decisive action against noncompliant individuals, regulatory authorities instil trust in the financial system. This increased confidence can drive greater investor participation, stimulate investment activity and ultimately contribute to overall economic growth. 

Levelling the Playing Field — SEBI’s stringent actions guarantee equal opportunities for registered investment advisers who adhere to regulatory standards. Through the crackdown on unregistered advisers, SEBI eliminates any unfair competition and prevents unqualified individuals from operating alongside legitimate professionals. This safeguards the reputation and credibility of authorised advisers while mitigating the risk of investors being deceived by unregistered entities. 

Promoting Growth of the Securities Market — The growth of the Indian securities market relies on a robust regulatory framework. SEBI’s crackdown on unregistered investment advisers contributes to establishing a secure and reliable environment for investors. This initiative fosters trust and confidence, encouraging greater participation in the Indian securities market. Ultimately, this increased investor participation will serve as a catalyst for promoting the growth and development of the market. 

Recently, SEBI issued a circular outlining the guidelines for advertising by investment advisors and research analysts. Among the notable restrictions mentioned in the circular is the prohibition on the usage of terms like ‘best’ or ‘No. 1’ in advertisements by investment advisors and research analysts. This measure was taken in response to numerous investor complaints on social media regarding misleading return expectations and projections made by certain investment advisors. SEBI has introduced a comprehensive set of compliance requirements and prohibitions applicable to both investment advisors and research analysts. 

Among other restrictions, SEBI has also imposed a prohibition on them from making any promises or guarantees of assured or risk-free returns to investors. Historically, investors have fallen victim to misinformation and deception arising from their limited understanding of investment products. In an effort to address this issue, the recent circular by SEBI also targets the usage of statements that exploit investors’ lack of experience or knowledge. Additionally, SEBI has advised investment advisors and research analysts to avoid excessive reliance on technical or legal jargon, complex language and the inclusion of unnecessary details that could potentially distract investors. 

It is safe to say the stringent measures by SEBI does benefit the investors, but it is the registered advisors who are taking a toll on their overall business productivity and diminishing their overall business opportunities. While the intention of SEBI is to purely protect the integrity of the market and provide safe havens to the investors, the increased requirements have stopped more investment advisors from entering the profession. In short, SEBI’s move will create an uneven playing field for the registered advisors. Here are the following reasons why we believe that SEBI’s actions against unregistered investment advisers may not achieve the desired results. 

Unfair Field — The set of constraints put up by SEBI in its latest guidelines, which research advisors need to now follow, is restricting them to go out in the open and talk about their capability or even about their past performance. In the current situation they are pitched against those unregistered advisors who are not following the latest guidelines. The unregistered advisors, not bound by these guidelines, are flourishing by giving out misleading information to the investors and actually end up picking up lot of business from them. This situation exacerbates the problem as aggressive non-compliant advertising and the assurance of commitments are becoming more prominent. Meanwhile, genuine advisors who adhere to compliance guidelines are being pushed into the background with their actions constrained by the regulatory requirements. 

The insufficient strength and manpower of SEBI to effectively monitor and ensure the proper implementation of their guidelines is leading to an uneven playing field. This situation creates an unfair environment for market participants. Furthermore, it imposes a greater compliance burden on registered advisers. The introduction of stricter regulations and oversight measures may necessitate the allocation of additional resources and time by registered advisers to meet the heightened regulatory requirements. Consequently, this diversion of focus could potentially impact their ability to deliver optimal client service and conduct thorough investment research. 

Inflexibility in Fee Structure — SEBI regulations outline the parameters for charging fees by investment advisors. These regulations mandate the imposition of both fixed and variable fees on clients, even if the services offered are entirely distinct. Additionally, there are restrictions on the maximum fixed fee that can be charged and the amount that can be collected in advance per quarter. These regulations pose significant challenges for advisors. Collectively, these conditions are impeding the entry of new advisors into the profession, which has negative implications for the general public. The absence of high-quality advisors creates obstacles for wealthy individuals seeking client-centric and unbiased advice, which is crucial for the overall wealth creation in the country. 

Taking Precautionary Measures — Protecting oneself from unregistered investment advisers is crucial for investors to safeguard their financial interests and make informed decisions. With the increasing number of fraudulent schemes and misleading practices in the financial advisory industry, it is essential to be aware of the red flags and take proactive measures to avoid falling victim to unscrupulous individuals. Here are some guidelines for investors to prevent themselves from becoming victims of unregistered investment advisers: 

Research and Due Diligence — Before availing the services of any investment adviser or firm, it is crucial to undertake comprehensive research. Take the time to verify if they are registered with the appropriate regulatory authorities, such as SEBI in India. Look into their professional qualifications, experience and any past disciplinary actions. It is important to verify their credentials, reputation and track record to ensure they possess a strong background in offering trustworthy financial advice. 

Verify Credentials and Licenses — It is important to ask for evidence of registration or licensing from the investment adviser. Registered advisers should possess the required certifications and licenses to operate within the legal framework. It is advisable to cross-verify the information provided with the relevant regulatory authorities to confirm its authenticity. Exercise caution when dealing with advisers who are hesitant to provide verifiable credentials or make claims that are challenging to substantiate. 

Seek Recommendations and Referrals — To find a reliable adviser, consider seeking recommendations from trustworthy sources such as friends, family or respected professionals like accountants or attorneys. Referrals from individuals who have had positive experiences with registered advisers can provide valuable guidance and help streamline the selection process. However, it is important to conduct your own research to ensure the adviser’s suitability for your unique financial goals and requirements. 

Understand Fee Structures and Compensation — It is important to inquire about the fee structure and compensation method of the adviser. Transparent disclosure of fees is essential to prevent any hidden charges or conflicts of interest. Registered advisers are generally obligated to provide information about their fee structure and disclose any potential conflicts that might impact their recommendations. Having a clear understanding of how the adviser is compensated helps ensure that their advice remains objective and aligned with your best interests. 

Request a Written Investment Policy Statement — An esteemed investment adviser should furnish a written investment policy statement that delineates your investment objectives, risk tolerance and strategies. This document acts as a guide for your investment endeavours and assures that the adviser comprehends your financial goals, customising their advice accordingly. It is imperative to carefully review the investment policy statement and seek clarification on any aspects that are unclear or ambiguous. 

Stay Informed and Educated — Demonstrate an active interest in comprehending investment concepts, strategies and potential risks. Engage in self-education regarding various investment products and markets to make well-informed decisions. By expanding your knowledge of investments, you will be equipped to ask pertinent questions and evaluate the appropriateness of advice offered by investment advisers. Stay abreast of financial news, regulatory developments and industry best practices to remain informed and up-to-date in the investment landscape. 

Trust Your Instincts and Exercise Caution — If something seems too good to be true or you feel uncomfortable with an investment adviser’s recommendations or tactics, trust your instincts. Exercise caution when dealing with highpressure sales tactics, guaranteed returns or investment opportunities that promise quick profits with little risk. Legitimate investment advisers understand the importance of a client’s comfort level and should respect your decision-making process.
 

Conclusion

SEBI’s crackdown involves stringent enforcement measures to identify and penalise unregistered investment advisers who have been operating outside the purview of regulatory oversight. By doing so, SEBI aims to ensure that investors receive reliable and legitimate advice from registered professionals who adhere to the necessary regulatory standards. By actively pursuing unregistered investment advisers, SEBI sends a clear message that compliance with regulatory requirements is non-negotiable. This move aims to deter unscrupulous individuals from engaging in unauthorised financial advisory activities, thereby protecting unsuspecting investors from falling victim to fraudulent schemes.
 

SEBI’s stringent measures also underscore the importance of investor education and awareness. It serves as a reminder for individuals to exercise due diligence before engaging with any financial adviser. Investors should verify the adviser’s registration status with SEBI and seek recommendations from trusted sources. Furthermore, understanding one’s financial goals, risk tolerance and investment horizon is crucial when seeking financial advice to ensure that the recommendations provided align with individual needs. However, as mentioned above, these guidelines may also pose some threat to the overall business opportunities for investment advisors.
 

Unless SEBI does not have the ability to ensure everyone follows the guidelines, they should not introduce these in haste. It is damaging the ecosystem and will lead to more scams and investors burning their hard-earned money. In short, curtailing honest advisors and not being able to control unregistered advisors is moving more money to unregistered advisors, thus aggravating the problem. At the same time, through the enforcement of regulatory standards and the elimination of unregistered entities, SEBI’s motives are clear in terms of establishing a fair and equitable environment for registered advisers and bolstering investor trust in the market.
 

Consequently, more individuals are likely to seek professional financial advice, confident in the knowledge that their interests are safeguarded and the guidance they receive adheres to regulatory guidelines, ensuring reliability and compliance. As investors become more aware of the importance of engaging with registered professionals, they can make informed decisions and navigate the financial landscape with greater confidence. It is but obvious that when it comes to the investment sector, there has to be a lot of transparency so that investors are not taken for a ride, especially those who may want to invest with some specific goals in mind such as the education of their children or the need to buy a home. Such investors need to be protected.