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what you need to know about sebi agents and investors test

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An investment operation is one which, upon thorough analysis, promises, safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.

- Ben Graham, father of Value Investing


The majority of population in India can be categorized under two investor groups

a) Conservative: Those who are too afraid to risk their money in investments and believe only in savings. Money often remains in saving bank account.

b) Aggressive: Those who want to make fast money and look for mechanisms that can multiply their investment in minimal time. Often get cheated.

Both the groups need awareness, information and guidance to protect their interests and at the same time increase the value of their money through investments best suited to them. However, it is a tragedy that most of the financial advisors or agents take undue advantage of client’s limited knowledge and rather than providing genuine advice, they only cater to their own interests.

Such practices have created an environment of mistrust and diffidence, pushing the conservative investor in savings corner and exposing an aggressive investor to frauds, illegal and cheap ways of making money.

The biggest issue for the financial advisors while making a recommendation to the client is conflict of interest. A dual role is played by the distributor as an agent of investors as well as of the manufacturer. The earnings they make come from two sources:

a) Commission from selling the product and

b) Fee charged from the client.

Very often distributors blindly think about themselves only and churn the portfolio to make huge commissions.

Another situation can be, when distributors sell more products of the manufacturer who is the best payer irrespective of the fact that some other product is fit for the client’s need.

Considering these malpractices and to protect the interest of naive investors, SEBI has introduced regulations for financial intermediaries.

The proposed regulatory framework intends to regulate the activity of providing investment advisory services in various forms by a wide range of entities including independent financial advisors, banks, distributors, fund managers etc.

The investment advice may be provided for investments in various financial products including but not limited to securities, insurance products, pension funds, etc. While the activity of giving investment advice will be regulated under the proposed framework through an SRO (Self Regulatory Organisations), issues relating to financial products other than securities shall come under the jurisdiction of the respective sectoral regulators such as action for misselling, violation of code of conduct, conflict of interest etc. The SRO set up for the regulation of Investment Advisors shall follow the rules/regulations laid down by respective regulators for products falling in their jurisdiction, including but not limited to suitability and appropriateness of the products.

As per new guidelines in order to carry on the activities of offering investment advisory services any person must get himself / herself registered as an Investment Advisor under the regulations.

Definitions as per the regulations:

Investment Advisor

Investment advisor for the purpose of the regulations shall be any person or entity that provides investment advice directly or indirectly for a consideration, which may be received directly from the investor or who holds himself out as an investment advisor.

Investment Advice

Investment advice shall be an advice written, oral or through any other means of communication given regarding investment of funds in financial products or products that are traded and settled like financial products purportedly for the benefit of the investor. It shall include:

(a) Financial advice; or

(b) Financial planning service or

(c) Actions which would influence an investment decision and are incidental to making an investment/investment decision.

Fee and charges:

In order for the client to be able to make an informed decision, the Investment Advisor is supposed to clearly indicate the fee and charges to the client. In case the advisor is empanelled with other intermediaries, it should be disclosed to avoid any conflict of interest.

In short, this is an initiative from SEBI to provide a structure and guideline to limit misconducts by agents and inform investors about their rights. Still the onus is on financial advisors and providers/manufacturers to create a positive environment for investment. To achieve this, they will need to focus on long term benefits rather than short term gains and will need to build confidence of investors. Investors also need to look for genuine investment and shall skip & ignore the grey areas by upgrading their knowledge and understanding there is no way to multiply money overnight. It is a long way to go but at least a right step by SEBI to create an investor friendly environment.

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