The Securities and Exchange Board of India (SEBI) has proposed that the business of advising people about investments be brought under regulations. The draft rules that the market regulator has published, propose a system for registering such advisers. It also sets forth rules on how advisers should conduct themselves and the process to be followed if advisers violate the rules. This is needed because a great deal of sharp business practices and market manipulation attempts are hiding behind advise.
However, I think that no matter how carefully drafted and assiduously applied the regulations are, they are going to be effective in protecting only those investors who want to be protected. Or let me put it this way, unless you are willing to make an effort and be your own SEBI, then the official SEBI is not going to be successful in protecting you.
What is it exactly that you need to protect yourself against? There are two different kinds of things that a unscrupulous advisor may try to do. The ultimate goal of any such adviser has to be to make money for himself. He could do this either by taking money from you or by inducing you (and a large number of other investors) to taking actions that end up affecting stock prices. The unscrupulous adviser could then make money out of these stock moments that he has induced. The two kinds of activities are very different in nature and are generally practiced by different kinds of advisers.
The guy who is trying to make money directly from you is generally trying to get you to conduct a lot of buying and selling, all of which ends up in him earning a lot of commissions. This kind of activity is very common and is intensively practiced by those selling all kinds of investment products, including stocks and mutual funds.
In my experience, many investors are under the impression that the aggressively marketed 'wealth management' outfits run by big name Indian and multinational banks are somehow above such practices. This is far from the truth. These outfits are among the most shameless perpetrators of excessive churning of their client's portfolios. Unfortunately, such activity is completely legal and probably difficult to catch and prove. The only way an investor can protect himself is by 'being his own SEBI'. However, the real SEBI can certainly help by mandating complete transparency in terms of commissions earned. This is actually there in the new draft regulations although I'm not sure which categories of intermediaries will this be applicable to.
Why is transparency important? I think once an investor knows, in black and white, how much an advisor or his employer stands to gain from the advise that is being given, it will automatically induce a degree of scepticism about excessive buying and selling. However, this transparency needs to be extended to all forms of financial products. In this matter, the regulator which needs to wake up is actually the IRDA. The kind of brazenly shameless misselling and overselling that is going on in the insurance business far outstrips anything that is happening in mutual funds or stocks. All that is needed to fix this problem is transparency. There's a simple consumer-friendly step that should be mandated.
Whenever an insurance agent is making a sales pitch, he should be obliged to hand over, in writing, the exact amount he stands to make as commission over the entire lifetime of the policy.
When one thinks about it, there's hardly any financial malpractice that can't be curbed by mandating a high degree of transparency. Once that is in place, I believe that most problems will sort themselves out.
The writer is CEO, Value Research India Pvt Ltd