The Securities and Exchange Board of India (SEBI) released a concept paper on regulation of investment advisors. The regulations propose that no person can offer investment advice unless he is registered as an Investment Advisor. And this advisor would require a much higher level of qualification than what the current agents have.

The regulator has observed that financial product distribution is affected by conflicts of interest between manufacturers of financial products (including banks, mutual funds and insurance companies, among others) and distributors which sell these products.

The regulator has directed its focus on addressing the conflict of the dual role played by distributors as an agent of investors as well as of manufacturers. As they receive commissions from manufacturers and advisory fees from investors, it is not clear whose interests they serve.

Radhey Sharma has an interesting post on "How good is free advice? Excerpts:

Free financial advice often ends in selling inefficient products to the investor which he does not need.

You are sold an insurance policy with the question “How much premium can you pay ?” as against “How much insurance do you need ?”.

Being bundled with bad products means the investor is losing a chance to make more money in the long run. He is also losing time to invest in the right products and his goal based investing concept is not in line with his asset allocation.

The problem with free advice is that none of it takes into account your risk taking capacity; none of them think on how many stocks and how many insurance policies you should have; none of them know how your money is spread across which sectors and whether it is well diversified – actually, none of the advice is actually free !

To tackle this conflict, SEBI has proposed that the person who interacts with the customer should declare upfront whether he is a financial advisor or an agent of the manufacturer. If he is an advisor, he would be subject to Investment Advisors Regulations and would require a much higher level of qualifications. He would receive all payments from the investor and there would be no limits set on these payments. On the other hand, agents associated with manufacturers would receive their remuneration from them.

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