Investment advisors under Sebi lens over complaints of overcharging

Sebi pulled up Highbrow Market Research for giving multiple intra-day trading tips to clients, despite their risk profile being averse to such positions

Registered investment advisors (RIAs) have come under the lens of the Securities and Exchange Board of India (Sebi) due to the increase in the number of complaints against them. According to people in the know, the market regulator has received a large number of complaints about high fees and clients being given an inaccurate picture of how much returns to expect.

Sebi also highlighted the issue while proposing self-regulatory body for RIAs in its recent consultation paper. "Since the last five years, the number of RIAs has shown an increase, particularly individuals, and there has been a corresponding increase in number of complaints against them," the regulator pointed out in its consultation paper. As of March 19, 2019, the total number of RIAs stood at 1,136 as shown in the data put out by Sebi (see: table).

Sebi recently pulled up Indore-based RIA Highbrow Market Research for giving multiple intra-day trading tips to clients, assuring high returns despite the clients' risk profile being not suitable for such market positions.

The regulator in its probe estimated that the entity had collected Rs 105 crore through fees for 'fraudulent advisory activity'. This amount was in accordance with the prima facie findings of Sebi.

Highbrow used a profit counter, which showed an 'hypothetcial' amount of profit an investor could earn on his investment value across different segments such as stocks, forex, commodities and derivatives markets. High fees were charged through multiple investment packages. Sebi observed that the service fee for such packages was higher than the investment amount that the client was asked to put in for the 'targeted' returns.

In the initial months of joining the service, the client is given multiple packages to charge as much fees as possible. Further, the client was put under pressure to pay the dues as the number of packages kept rising. As clients followed the trading call messaged by Highbrow, their overall margin obligations rose higher than their willingness to invest.

"Like any category of investment intermediaries, there are some cases of wrongful conduct among the RIAs as well. However, the regulator needs to take prompt and strict action to keep investor trust intact as RIAs advise on multiple investment products," said Amol Joshi, founder of Plan Rupee, a Mumbai-based independent financial advisor (IFAs).

Further, such complaints could impact the regulator's push for the RIA model, which was seen as giving more transparency to investors. Last year, Sebi floated a consultation paper indicating that individuals distributing mutual fund products will have to get an RIA license and follow a fee-based model to advice beyond suitability of 'product categorisation'. 

The proposals led to confusion among IFAs as they pointed out instances where new MF investors needed more holistic advice.