Advisory fee

An Investment Adviser is paid for one thing only: giving advice. The booklet is precise about the boundary — you pay the advisory fee, and nothing else passes through the adviser's hands.

That boundary matters because it is exactly where fraud tends to happen. The booklet lists "charging exorbitant fees from client with a false promise of handsome returns" as a malpractice reported to SEBI. Its Do's and Don'ts add specific discipline around how the fee itself should be paid — through banking channels, with a signed receipt, and against clearly written terms.

Registered advisers operate under the SEBI (Investment Advisers) Regulations, 2013, last amended by the booklet's own account on 3 July 2020.

The booklet's Do's for dealing with Investment Advisers set out the fee discipline directly: "Pay only advisory fees to your Investment Adviser," and "Make payments of advisory fees through banking channels only and maintain duly signed receipts mentioning the details of your payments." Investors are also told to "Insist on getting the terms and conditions in writing duly signed and stamped," reading them "particularly regarding advisory fees, advisory plans category of recommendations."

On the Don't side: "Do not give your money for investment to the Investment Adviser" — the fee is the only payment that should ever go to an adviser; investment capital itself must go elsewhere, such as directly into the investor's own trading or bank account. The booklet also states advisers "have to limit themselves to giving advice and they should not handle cash or securities."

Among the malpractices SEBI has received complaints about: "Charging exorbitant fees from client with a false promise of handsome returns," and advisers who, after a complaint about a loss, "offer higher risk products to clients with a promise that they will recover their losses" — using the promise of recovering fee-related losses to extract further fees or riskier business.

Deepika engages a SEBI-registered Investment Adviser who quotes an annual advisory fee of Rs 25,000, put in writing and signed by both sides.

She pays the Rs 25,000 by bank transfer, and the adviser issues her a signed receipt recording the amount and date, exactly as the booklet's Do's instruct. She does not hand over any additional money for the adviser to invest on her behalf — her actual investments go directly into her own demat and bank accounts.

A different adviser approaches her later, asking for a "one-time review fee" of Rs 80,000 in cash, with no written terms and no receipt, promising in return "guaranteed recovery" of a loss she mentioned from an earlier investment. Every element of that second approach — the exorbitant amount, the cash payment, the missing receipt, and the promise of recovery for a further fee — matches a malpractice the booklet lists; Deepika declines and reports the approach to SEBI.

Chapter 11 (Caution against Ponzi Schemes and Unregistered Investment Advisers) sets the advisory fee rules inside its Do's and Don'ts and its malpractice list, alongside the Investment Adviser registration requirement covered in the same chapter. Expect the exam to test how an advisory fee must be paid — banking channels only, with a signed receipt — and that an adviser must never handle client cash or securities beyond that fee.

• Advisory fees must be paid through banking channels only, never in cash, and a signed receipt must be kept for every payment.
• An adviser should never receive investment money itself — only the advisory fee. Handing investment capital to an adviser directly is a listed Don't.
• An exorbitant fee paired with a promised high return is a listed malpractice, not simply a matter of one adviser charging more than another.
• The regulations cited are the SEBI (Investment Advisers) Regulations, 2013, as last amended, in the booklet's own account, on 3 July 2020 — later amendments are not reflected in this booklet.
• Do not confuse the advisory fee, paid for advice, with assured returns, a separate red flag about the promised outcome of an investment — the two are different malpractices that can appear together, as in a fee charged alongside a false return promise.