In July 2020, the Securities and Exchange Board of India (SEBI) amended
the Investment Advisers Regulations to protect the interest of investors. The new regulations have dramatically changed the way advisory services operate. 


Prior to the amendment, investment advisers also acted as mutual fund distributors. They would charge their clients a fee and recommend products that earn them maximum commission from AMCs. The interests of the adviser and the client were not aligned.


Now investment advisors cannot ‘distribute’ financial products, and mutual fund distributors cannot offer financial advice. Even non-individual advisors have to maintain client-level segregation between their investment advisory and distribution services to avoid any conflict of interest.


Distributing mutual funds and insurance products used to be a lucrative revenue source for advisers. If you are an adviser, you have probably dropped distribution from the list of your services and taken a hit on your revenue.


SEBI has also capped the fee advisers can charge their clients: ₹125,000 per year per client if you charge a fixed fee or 2.5% of the asset under advice (AUA) if you charge a percentage of the AUA. 


Further, the regulator has instructed investment advisers to advise only direct plans of financial products to their clients, which don’t earn them any commission.

The future growth avenues

Advisors need to start expanding their target market to make up for the lost revenue and drive future growth. 


Given the country’s growing middle-class and their shifting interest from physical assets to equity markets, hundreds of millions of Indians will need investment advice in the years to come. Most of the new investors will be coming from Tier-2, Tier-3 cities and small towns. 


The rich (ultra high net worth individuals) already have their reliable investment advisers. So, there is limited room for growth in this segment. Investors from smaller cities will be driving the future growth. 


For decades, Indians have invested most of their wealth in physical assets such as gold and real estate. 


According to the Reserve Bank of India’s 2017 Indian Household Financial Survey, an average Indian household has 84% of its assets in real estate and other physical goods, 11% in gold, and merely 5% in financial assets such as savings accounts, fixed deposits, mutual funds, and stocks. 


Physical assets as well as the relatively safer debt instruments have struggled to deliver lucrative returns over the last decade. So young investors are turning to equity markets. 


Millions of Internet-savvy Indians took to the stock market during the COVID-19 pandemic. According to data from the NSDL and CDSL, the number of active investor accounts in India rose by a staggering 10.2 million in 2020. 


India is still in the early stage in the financialization of savings. Only 3.7% Indians invest in equity markets compared to 55% in the US and 12.7% in China. Legendary emerging market investor Mark Mobius has said that India is likely to follow China in terms of retail investor participation.

So many investors, so few advisers

The cheap Internet access allows investors to buy stocks and mutual funds with ease. It also gives advisory firms an opportunity to target hundreds of millions of Indians who need help with financial planning and investing.


Since distributors can no longer offer investment advice, there is a real shortage of investment advisers in the country. 

According to Dhruv Mehta, chairman of the Foundation of Independent Financial Advisors, there are only about 1,500 investment advisors in India. 


This small group of advisers has the responsibility of improving the financial wellness of hundreds of millions of investors across the country. Getting human advisors to serve the masses is not an efficient and cost-effective affair.


If you charge small town investors a percentage of the asset under advice (AUA), you might not earn much given the relatively smaller size of their portfolio. 


And if you charge a fixed fee, you might alienate a lot of small investors because people who invest ₹3,000 a month in equities cannot afford a human advisor who charges ₹15,000 to ₹40,000 a year in fees.


These factors make it hard for advisory firms to justify human advisors for this segment of the market. 

Low-cost, automated advisory for the masses

It’s no-brainer to use robo-advisory software to target the mass-market. It allows advisory firms to cater to small investors from all over India while maintaining effectiveness and lowering the cost for investors. It’s a win-win!


For investors, a robo-advisor costs only a few thousand rupees. It determines their financial needs, risk tolerance, asset allocation, and maps out their financial plan for a very small fee.


Robo-advisors try to understand investors beyond the requirements of KYC and provide recommendations customized to each investor’s financial goals, risk appetite, and time horizon. It is efficient, cost-effective, and secure.


For sophisticated investors or those with a complex financial situation, a human advisor could step in to offer the services. 


SEBI doesn’t have any specific regulations for automated tools such as robo-advisory services. However, the regulator has said earlier that robo-advisory services have to comply with the existing provisions.


Even if SEBI regulates the automated advisory service, experts believe it would follow the footsteps of the Monetary Authority of Singapore (MAS). The MAS simply issues a license to robo-advisory firms and requires a post-authorization audit.


SEBI’s amended regulations not only prohibit investment advisers from distributing financial products, but also cap the fees they can charge their clients. 


Advisers have to look for new growth avenues by expanding their target market beyond major cities. Robo-advisory software would enable them to serve a much bigger market on autopilot.