Would you ever prefer to get your surgery from the pharmacist?
Of course not, as he is eligible only to provide you with the prescribed medicines on the other hand, the surgeon does a proper health checkup and discusses the risk involved and other parameters before surgery.
In short, Pharmacists & Surgeons both play a vital role but merging their roles could be fatal for your health and life.
See, how concerned we are when it comes to our physical health, and even the higher bodies regulating the same, consider these roles very strictly.
But when it comes to financial health, why a person or the regulatory body does not consider such parameters?
Didn’t understand?
Let’s put light on the SEBI’s latest circular regarding amendment in RIA regulation where the regulatory body has highlighted a point of merging the roles of IA and RA.
Now to understand how this merger is going to affect investors, let’s first understand the difference in the roles of the two.
Understanding the Difference Between IA & RA
Now to assist traders in trading & investment, there are two different profiles regulated by SEBI, Investment Advisors & Research Analysts. Both these are involved in providing trading calls and investment advice to their clients. But there is a thin line that differentiates the two.
- Investment Advisors (IAs) provide trading calls after considering personalized financial situations, risk tolerance, and financial goals.
- Research Analysts (RAs) offer broad research on stocks, sectors, and market trends but do not provide specific, personalized advice to individual clients.
The proposed merger would effectively eliminate this distinction, making it possible for a single entity or individual to act as both an IA and RA under one registration.
However, the registered individual has to keep both his clients separate and has to maintain proper segregation between departments. But realistically speaking, will it be possible?
Moreover, the client taking services, or who has taken such services, actually knows from whom are they taking calls.
It is not too old when SEBI penalized one registered RA who was providing IA services to his clients. This means there was a time when SEBI itself considered this an issue and now has brought a consultation paper with the amendment in the rule.
Also, if the clients taking services themselves are not aware of the difference and the merger would further increase the confusion, it would have been better, if SEBI had considered only one profile, i.e. Investment Advisors who are doing a proper check of a client and providing one-to-one personalized services.
This would have decreased the loss percentage and helped clients reap more benefits from trading in the market.
Anyway, let’s dive a little deeper to look at the impact of this amendment on investors.
Pros for Investors
However, the merger of the two has significant drawbacks but if one looks deeper investors can reap some of the benefits with this merger, like:
- Cost-Effective Advisory:
By combining roles, there may be a reduction in administrative and compliance costs for advisory firms, potentially lowering the fees charged to investors.
With one registration and a unified approach, investors may benefit from lower service costs. - Improved Accountability:
Since both advisory and research services would be offered under one roof, there’s greater accountability for advisors. IAs and RAs would provide more accurate information and better advice.
A single entity responsible for both functions could help in building better trust and transparency, giving investors more confidence in their advisors. - Comprehensive Approach:
Currently, IAs and RAs may operate independently. RA providing general trading calls is not able to set any connection with the client and hence remains unaware of the client’s personal financial needs.
However, merging these roles will provide a more comprehensive and aligned approach leading to better, more integrated recommendations. - More Competitive Market:
The consolidation of these roles could potentially lead to a more competitive market.
By eliminating the need for separate entities, smaller advisory firms might emerge, offering more personalized services and greater competition among existing players.
Cons for Investors
However, there are some advantages, but if look at the other side, there are more disadvantages associated with this merger. Here are some highlighted ones.
- Potential for Conflicts of Interest:
A key concern with merging the roles of IAs and RAs is the risk of conflicts of interest. Now just imagine, that a single person is providing general advisory to one set of users and personalized recommendations to the other one.
Now, don’t you think that due to this, there are chances that the registered person would focus on the stocks that benefit their research rather than that benefit his client? - Compromise with the Expertise:
Currently, RAs specialize in deep market research, while IAs focus on understanding client needs and providing personalized advice. By merging these roles, there’s a risk that there would be a compromise with the level of knowledge & expertise.
An individual or firm may not be able to maintain the same level of specialization and knowledge across both functions, which may negatively affect the quality of services offered to investors. - Higher Regulatory Burden:
While the merger might reduce confusion, it could increase the regulatory burden on advisory firms.
They would need to comply with regulations governing both IAs and RAs, which may lead to an increased cost of compliance.
These costs could eventually be passed on to the investor, negating any initial cost-saving advantages. - Less Personalization for Larger Client Bases:
As advisory firms take on both advisory and research roles, they might focus more on general research to cater to a larger client base, rather than providing truly personalized advice.
Investors seeking personalized strategies tailored to their unique financial situation might find the quality issue in the recommendations.
Conclusion
The circular with the details to merge the roles of Investment Advisers and Research Analysts marks a significant shift in how financial advice and market research are delivered in India.
For investors, this merger offers the potential for streamlined services, lower costs, and improved accountability.
However, it also introduces concerns around conflicts of interest and a higher regulatory burden that could affect the quality of advice.
As with any regulatory change, the impact will depend on the final implementation of SEBI’s guidelines and how well firms adapt to this new structure.
Investors should stay informed and consider how their advisory relationships might evolve under the new rules to make the most of the potential benefits while mitigating risks.
