The Securities and Exchange Board of India (Sebi) on February 12, 2025 came out with a consultation paper on advance fees charged by registered investment advisors (RIAs) and research analysts (RAs). The capital markets regulator has proposed to increase the period of advance fee charged by RIAs and RAs to up to 12-month period.
Sebi has invited public comments on the draft circular, Consultation Paper On Advance Fee To Be Charged By Investment Advisers And Research Analysts, by February 27, 2025.
Existing Guidelines For Advance Fee
Under existing rules, RIAs can charge fees for a maximum of two quarters, while RAs can charge for not more than one quarter.
The existing provisions are in place to protect the interests of investors to ensure that they do not end up paying the entire fee in advance.
Why Sebi Wants To Extend The Advance Fee Period?
Sebi said it received requests from RIAs and RAs asking for relaxation of the advance fee rule.
The RAs argue that the prevailing rule discourages them from providing long-term recommendations and disrupts their usual fee-charging practices. The RAs also believe that the option to charge fees periodically would cause inconvenience and additional costs for them as well as their clients.
RAs also say that clients usually won’t stay with them beyond three months unless they see value in the advice. This pressure often forces RAs to make short-term recommendations to show results to retain clients. Thus they would have no motive to provide recommendations for longer term, which may not always be in the best interest of investors.
Will Extension Of Advance Fee Period Be In Investors’ Interest?
Allowing a 12-month advance fee could potentially work against investors’ interests, as it might be difficult to get refund in event of an early termination of the agreement, Sebi has said. However, the Association of Registered Research Analysts (ARRAI) has argued that refund requests are generally handled promptly, within 5-7 days.
According to the prevailing norms, RIAs, if the agreement is terminated early, the client is entitled to a refund for the unexpired period of the service. However, considering the costs involved in onboarding clients, RIAs can retain a breakage fee, which should not exceed the fee for one quarter of service.
For RAs, if the agreement is terminated early, the client will receive also a refund for the remaining period of the service. However, RAs are not allowed to charge any breakage fee in such cases.
Sebi has also clarified that the fee-related provisions will only apply to RIAs and RAs dealing with individual and Hindu-Undivided Family (HUF) clients. In case of non-individual clients, accredited investors, and in case of institutional investors seeking recommendation of proxy adviser, fee related terms and conditions shall be governed through bilaterally negotiated contractual terms, Sebi said.
