InvestorQ : Why has SEBI restricted investment advisors from giving free trial offers to potential customers? What is wrong in that?
Deepa Salunkhe made post

Why has SEBI restricted investment advisors from giving free trial offers to potential customers? What is wrong in that?

Juvina Maggie answered.
3 years ago

SEBI has issued an order barring all its Registered Investment Advisors (RIAs) from giving free trials of their services to customers or accepting part payments for their services. This is a standard strategy adopted by many RIAs since most potential customers insist on a trial run before taking a final decision. More importantly, SEBI has also underlined that these RIAs can only give advice after conducting thorough risk profiling of clients. Risk profiling is the scientific process of identifying the risk bracket the client falls in based on risk appetite and risk capacity. All investment suggestions must only be based on such client profiling.

In addition, SEBI has also insisted that RIAs must display complaints against them on their own websites and can only accept payments through banking channels. Registered Investment Advisors are authorized to give investment advice on all types of financial products in exchange for a fee and they need to go through a detailed examination for this certification. The purpose of this announcement by SEBI is to curb stock tips providers who were offering free trials and introductory payment plans to lure investors. Then many of these clients have found themselves left in the lurch with bad advice. These provisions will also apply to online and real time RIAs.

The move is in the right direction as the market needs to be made safer and more transparent. A handful of fly-by-night advisors were spoiling the efforts of many genuine RIAs. However, these provisions could be problematic in two ways. Firstly, the circular lays down that investment advice can only be given after the customer consents to the risk profiling in a physical document or through his registered email address. Currently, online RIAs simply provide online forms to be filled by customers and collecting such consent may be impractical. Also, many times clients are not interested in detailed profiling. Secondly, SEBI free trial is more of a marketing tactic by many advisors and that is something many Indian customers also find attractive. Hence putting a blanket ban on that may not be a good idea. Better regulation could be a better answer. The biggest challenge now is that these rules will put RIAs at a disadvantage versus mutual fund distributors. Mutual Fund distributors are authorized to offer advice that is incidental to their business of distribution. These distributors may actually benefit at the cost off advisors.