With the Securities and Exchange Board of India (Sebi) insisting on a physical agreement between financial advisors and investors, a move that will increase the costs of acquiring clients, these new-age firms providing algorithm-driven investment advice — known as robo advisory — are revisiting the viability of such platforms in their current form.
Fintech companies and robo-advisory services cater to investors, who can afford to invest only as low as ?500 in mutual funds. Most traditional investment advisors do not cater to small investors. Fintech companies are able to keep costs low as all processes are automated.
But, an informal guidance by the capital markets regulator given to fintech company Paytm Money on April 16 has disrupted their existing system. Sebi opined that digital consent between an investment advisor and an investor cannot be considered valid. The regulator has insisted on a physical agreement. Till now, most fintech companies got prospective clients to agree on the terms online before onboarding them. Sebi rules do not make any distinction between an investment advisor and a robo-advisor when it comes to the mandatory agreement with clients.
Following the Sebi guidance, at least a couple of fintech firms have put their robo-advisory plans on hold. The chief executive officer of a leading fintech-based brokerage told ET on condition of anonymity said this guidance has put the firm’s plans to launch this business this quarter on hold. “Sebi’s directive would make this business model unviable,” the CEO said. “Sebi’s interpretation of advisory norms, especially clauses dictate users must collect a physical consent instead of an electronic one over e-mail.”
The need for physical agreement copies puts these fintech firms at a disadvantage compared to other market services rendered online including the sale of mutual fund units and stocks, said lawyers.
“It is surprising that an investor can open a trading account with brokers, invest in mutual funds and make investments in other securities in a completely digital manner but only for receiving investment advice that physical copies of agreements need to be signed,” said Anil Choudhary, partner, Finsec Advisors.
Some of the smaller fintech players are exploring innovative structures to stay out of the ambit of Sebi’s Investment Advisory rules. For instance, some of the firms are providing advisories services as an “ancillary” or “complementary” service to customers along with platform offerings.
“Some of the firms harbouring advisory ambition are rendering general advice and market notes classifying themselves as research analysts instead of IAs (Investment Advisors) as the regulations around the former are much more lenient,” said Pranjal Kamra, founder Finology, a financial advisory service.