SEBI’s Ruling: RIAs Cannot Offer PMS Services with Performance-Linked Fees

SEBI chief, Madhabi Puri Buch, has emphasized that Registered Investment Advisors (RIAs) are restricted to charging investment advisory fees from clients and are not allowed to provide portfolio management services (PMS) with performance-linked fees. Buch made this announcement during her speech at the Association of Registered Investment Advisers (ARIA) event on financial planning and investment advisory in Mumbai.

Buch clarified that RIAs can offer financial advice to clients, but any fees or charges must align solely with their advisory role. She noted that RIAs cannot impose referral fees or performance-linked fees, even if their recommendations yield positive results.

Presently, RIAs fall into three main categories based on industry practices: those offering financial planning, those following a long-term buy-and-hold strategy resembling PMS, and those providing stock tips. Buch stated that while SEBI is actively addressing issues related to stock tips and malpractices, running unauthorized PMS schemes with performance-linked fees is strictly prohibited under the Investment Advisers (IA) regulations.

Additionally, Buch emphasized that RIAs are not permitted to receive fees other than investment advisory fees. This prohibition extends to referral fees for unregulated products, such as the EB-5 Investor Visa or fractional real estate.

Furthermore, Buch assured RIAs that SEBI will engage with the advisory committee to explore potential relaxations in education qualification requirements for hiring para planners and the examination process for existing RIAs. However, there will be no relaxation in the requirement to corporatize business operations after reaching 150 clients, she noted.

Buch also mentioned the introduction of a portal that allows investors to pay advisory fees to Registered Investment Advisors (RIAs) and research analysts (RAs). This portal aims to enhance transparency and enable better tracking of investment advisors’ activities.

The SEBI chairperson urged RIAs to complete their registration with BSE Administration and Supervision Limited (BASL), the primary regulatory authority. She revealed that 35% of RIAs have yet to register with BASL, a fundamental requirement to ensure business continuity within the industry.