Sebi Allows RAs, IAs To Collect Advance Fee For Up To One Year - What It Means For Investors

The Securities and Exchange Board of India (Sebi) on April 2 allowed investment advisors (IAs) and research analysts (RAs) to charge advance fees for up to a maximum of one year, effective immediately. Until now, RAs were allowed to charge advance fees for only up to three months, while IAs could charge for up to six months. "If agreed by the client, IAs and RAs may charge fees in advance, however, such advance shall not exceed fees for a period of one year," Sebi said in a circular dated April 2.

The capital market regulator clarified that the fee-related provisions like fee limits, payment methods, refunds, advance fees, and breakage fees, will only apply to individual clients and Hindu Undivided Families (HUFs), provided they are not accredited investors. These provisions will not apply to non-individual clients, accredited investors, or institutional investors seeking recommendations from proxy advisers. For these clients, fee-related terms and conditions will be governed through bilaterally negotiated contracts, Sebi said in its circular.

Why The Need To Extend Advance Fee Period

The relaxation comes after Sebi received complaints from RAs and IAs regarding the previous restrictions on advance fees. The complainants were concerned that the limit discouraged them from offering long-term recommendations and interfered with their usual fee structure. RAs and IAs also contended that charging fees on a periodic basis causes inconvenience and leads to extra costs for both them and their clients.

According to their argument, clients usually don’t stay beyond three months unless they find value in the advice. This pressure often leads RAs to give out short-term recommendations to show quick results and retain their clients. This disincentivised them from offering recommendations for the long-term, which they argued may not always be in the best interest of investors.

What It Means For Investors

Allowing RAs and IAs to collect fees in advance for one year could potentially be not in the interest of investors, as it might be hard to get a refund if case the agreement is terminated early, Sebi had argued earlier in a consultation paper. However, the Association of Registered Research Analysts (ARRAI) says that refund requests are usually processed promptly, within 5 to 7 days.

Under the existing norms, if an IA ends the agreement early, the client is entitled to a refund for the unused portion of the service. However, IAs are allowed to retain a breakage fee, which should not exceed one quarter's fee. For RAs, if the agreement is terminated early, the client will get a refund for the remaining service period. However, RAs are not allowed to retain a breakage fee in such cases.