Sebi proposes to allow investment advisers, research analysts to charge advance fee for up to 1 year

The Securities and Exchange Board of India (Sebi) on Wednesday floated a consultation paper, proposing changes to the rules regarding advance fees charged by investment advisers (IAs) and research analysts (RAs).

The market regulator’s proposal seeks to reassess the period for which these professionals can collect advance fees from their clients, with the possibility of extending it to a maximum of one year.

Current provisions and issues

Under the current regulations, which were amended in 2020 and 2024, IAs can charge fees for a period not exceeding two quarters (six months), while RAs are limited to one quarter (three months). These provisions, introduced to protect investors, ensure that clients are not locked into a long-term contract with an adviser or analyst, particularly if they feel dissatisfied with the services.

However, there have been representations from RAs arguing that the current limitations disrupt the practice of offering long-term advice. According to these professionals, the three-month limit encourages short-term recommendations, as they are incentivized to deliver immediate results to retain clients. This undermines the quality of advice, particularly for long-term investors who need strategic insights over extended periods.

Investor protection vs professional convenience

The primary aim of the regulations was to protect investors by ensuring that they could easily switch advisers or analysts if they were not satisfied with the services, without losing large sums of money. A key concern with extending the advance fee period to one year is that investors may struggle to get refunds if they terminate the agreement early.

However, the Association of Registered Research Analysts of India (ARRAI) has argued that refund requests are handled promptly within five to seven days, mitigating concerns about the investor’s ability to recover funds. 

Additionally, under current rules, both IAs and RAs are required to refund unexpired fees if services are terminated prematurely. For IAs, a breakage fee is allowed, but is capped at a maximum of one quarter’s fee, while RAs are not permitted to charge any breakage fee.

The paper also clarifies that these new provisions would apply only to individual and Hindu Undivided Family (HUF) clients. For non-individual clients, accredited investors, and institutional clients, the terms and conditions related to fees would be governed by bilaterally negotiated contractual agreements, offering more flexibility to both parties.

SEBI is actively seeking comments from the public on these proposals, inviting stakeholders to submit their suggestions by February 27, 2025.