Registered Investment Adviser

An investor buying shares, bonds or fund units can get help in two very different ways. One kind of helper earns money by selling — a mutual fund distributor or an insurance agent, paid a commission by the product they place, whether or not it suits the investor. The other kind bills the investor directly for advice, and earns nothing from what gets bought.

A Registered Investment Adviser (RIA) is the second kind. SEBI licenses individuals and firms under the SEBI (Investment Advisers) Regulations, 2013 to use the title, and — this is the part the workbook stresses — after that regulation came into force, distributors, brokers and insurance agents who used to call themselves "advisers" can no longer claim the title. Only a SEBI-licensed RIA may.

The workbook (Chapter 2, section 2.4.1.1) sets out what an RIA does and how it is meant to differ from a seller.

An RIA is paid a fee by the investor who hires it, not a commission from a product manufacturer. Because of that, the regulation holds RIAs to obligations a commission-earner is not held to:

• follow a strict code of conduct;
• offer advice in the investor's best interests;
• disclose any conflict of interest; and
• carry out basic risk profiling, assess the investor's needs and financial health, and build a financial plan.

The regulation took effect in 2013. Before it, the word "adviser" was used loosely by anyone selling a financial product; the workbook is explicit that mutual fund distributors, share brokers and insurance agents who would earlier act as investment advisers can no longer claim the title.

The RIA is one of five channels the workbook lists for investing through a managed portfolio — alongside mutual funds, portfolio management services, alternative investment funds and specialized investment funds — but it is the only one of the five paid to advise rather than to manage or distribute.

The fee and portfolio size are illustrative; the regulatory distinction is from the workbook.

Mrs Kavitha Iyer has Rs 40 lakh to invest and is choosing between two people who both talk like financial experts.

Mr Nair, a mutual fund distributor. He recommends five funds. Mrs Iyer pays him no fee — his income is the trail commission the fund houses build into each scheme's expense ratio, roughly 0.5-1% a year, paid whether or not the funds suit her.

Ms Rao, a SEBI Registered Investment Adviser. She charges Mrs Iyer a flat advisory fee of Rs 20,000 a year, billed directly. She recommends direct plans of the same funds, which carry no distributor commission, and discloses in writing that she has no arrangement with any fund house.

Only Ms Rao may describe herself as an "adviser" under SEBI's rules. Mr Nair is a distributor, and after the 2013 regulation he may not use that title even if his recommendations happen to be sound. The distinction is not about who gives better advice — it is about who is paid how, and who is therefore bound to put Mrs Iyer's interest first.

Chapter 2, section 2.4.1.1 ("Role of registered Investment Advisers"), introduces the RIA as one of the channels through which an investor accesses a managed portfolio, immediately before the workbook turns to mutual funds, portfolio management services, AIFs and SIFs in the same section.

Expect a question asking which regulation created the RIA category and in what year (the SEBI (Investment Advisers) Regulations, 2013), and one asking who can no longer call themselves an adviser after that regulation (mutual fund distributors, share brokers and insurance agents). The chapter frames RIAs as fee-based and accountable, in contrast to the commission-based channels covered a few paragraphs later — a contrast the paper likes to test directly.

The same headword is also taught, in more regulatory depth, by other papers from their own workbooks — X-A's Introduction to Investments and XIX-C's Types of Investments both cover it.

• "Adviser" is a protected word, not a job description. Anyone can give financial opinions informally; only a SEBI-licensed RIA may use the title "investment adviser".
• Fee-based is not the same as free. The investor pays the RIA directly. A distributor's apparently "free" advice is paid for indirectly, through commission built into the product.
• A distributor is not a lesser channel — it is a different one. The workbook does not say distributors are prohibited; it says they cannot claim the adviser title.
• Do not confuse an RIA with portfolio management services. An RIA advises; a portfolio manager takes discretion (or acts on direction) to actually manage the money.
• 2013 is the date to remember, not a later amendment year — the workbook anchors the whole distinction to that one regulation.