Want to be a financial advisor? Here’s how

For those ready to step into this challenging but rewarding field, there are three key paths: obtaining a Mutual Fund Distributor (MFD) licence, registering as a Sebi Investment Advisor (RIA), or qualifying as a Sebi Research Analyst (RA). Each route offers distinct opportunities and challenges, shaping your role in India’s financial ecosystem.

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While this article outlines the key aspects, it is advisable to consult an expert before applying for a licence, as the information provided is illustrative, not exhaustive.

What’s the scope of advice?

An MFD cannot provide comprehensive financial or investment advice. Their role is limited to offering ‘incidental advice’, a term the regulator defines as, “basic advice pertaining to investment in mutual fund schemes limited to such schemes/products being distributed by him to his client.”

They cannot provide comprehensive financial or investment advice. While some MFDs may act as financial advisors, drafting financial plans or advising on various financial products requires an RIA licence.

Registered investment advisors, meanwhile, provide holistic financial planning. From selecting mutual funds to estate planning, the scope of their advisory is vast. However, any advice outside the purview of the Securities and Exchange Board of India (Sebi), such as tax planning, must include a disclaimer. RIAs can specialize and charge fees upfront, detailing their services.

Those involved in research activities, such as stock or securities selection, should consider obtaining an RA licence. Sebi now permits RAs to create model portfolios for a fee, enabling them to curate securities baskets for clients, though execution remains the client’s responsibility.

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Research analysts can also provide buy-and-sell recommendations or offer research reports for a fee. This role is somewhat akin to that of a fund manager, but with a key distinction: clients must act on the recommendations themselves, unlike in a fund structure where the asset manager handles execution.

A key distinction between RIA and RA is that while the former provides one one-on-one advice tailored to each individual’s needs and requirements, the RA sells a standard subscription to everyone. (one-to-many)

Neither RIAs nor RAs are permitted to showcase past performance. To address this, Sebi is developing a “Past Risk and Return Verification Agency (PaRRVA).” Once operational, this agency will allow RAs and RIAs to present audited records of their past performance.

How to make ₹1 lakh a month?

A key distinction among MFDs, RIAs, and RAs lies in how they earn their income.

MFDs rely solely on commissions from selling regular mutual fund schemes, meaning the client never pays them directly. In contrast, RIAs and RAs charge fees directly from their clients. The primary difference between the two is that RIAs can offer customised fee structures for individuals, while RAs typically charge a flat fee for their services.

Let’s break down the numbers. If you hold an MFD licence and earn an average commission of 0.65%, you would need to have assets under management (AUM) of approximately ₹18.5 crore to achieve an annual income of ₹12 lakh.

RIA fees, on the other hand, are more flexible. They can charge up to 2.5% of the assets under advisory or impose a fixed fee capped at ₹1.51 lakh annually.

For RAs, earnings depend on the number of clients rather than AUM. For example, if an RA charges ₹10,000 annually per client, they would need 120 paying clients to generate a monthly income of ₹1 lakh. Sebi allows RAs to charge a maximum of ₹1.51 lakh from an individual client.

Is it difficult to get a licence?

The MFD licence is the easiest to obtain. The primary requirements are being at least 18 years old and passing the NISM 5A exam to qualify for an ARN number. In FY24 (up to 30 November), 130,000 candidates appeared for the exam, with a 50% success rate.

Historically, obtaining an RIA licence was far more challenging, but Sebi has recently eased some of the entry barriers. To become an RIA or an RA, candidates must hold a degree in specific fields or possess a CFA charter or NISM postgraduate qualification.

Additionally, RIAs must pass both the NISM XA and XB exams, which have some of the lowest pass rates among the NISM exams. In the same period, the NISM XA and XB exams had pass rates of 31% and 61%, respectively. For comparison, the NISM XV exam required for an RA licence had a pass rate of 41%.

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Previously, RIAs and RAs were required to retake the same exams every three years. However, a recent amendment now allows them to clear the NISM 10C exam instead, which focuses on regulatory and industry developments from the preceding three years.

How difficult is it to run daily operations?

MFDs face the least compliance burden when it comes to onboarding clients and maintaining records. They are required to maintain transaction data, which is typically managed through the platforms they use for transactions. Additionally, MFDs must complete basic risk profiling—often through a simple questionnaire—before selling a mutual fund to a client. If an MFD reaches a certain scale, the Association of Mutual Funds in India conducts additional due diligence on their processes.

In contrast, RIAs have significantly heavier compliance requirements. They must maintain detailed records of all communications with clients and potential clients, including call recordings and written correspondence.

RIAs are also required to comply with the Prevention of Money Laundering Act (PMLA), draft letters of engagement for new clients, regularly update client risk profiles, and address complaints filed through SCORES. On average, RIAs report spending 12 hours a month on compliance-related tasks.

RAs, too, must adhere to stringent compliance norms. They are required to maintain KYC records for all clients under the new regulations. When trading on their own account, RAs must follow Sebi guidelines, such as refraining from trading a stock 30 days before or five days after making a recommendation. Additionally, RAs must publish a rationale to support their recommendations.

Until recently, RIAs and RAs were subject to net worth requirements. However, this has been replaced with a deposit system.

RIAs and RAs now need to maintain a deposit of ₹1 lakh for up to 150 clients, ₹2 lakh for 151 to 300 clients, ₹5 lakh for 301 to 1,000 clients, and ₹10 lakh for more than 1,000 clients. Previously, the minimum net worth requirement was ₹5 lakh for an individual RIA and ₹1 lakh for an individual RA.

RIAs or RAs managing more than 300 clients must transition to a corporate licence, which follows the same deposit structure.

What should you do?

Your choice of licence depends on your career ambitions.

Opt for an MFD licence if you want to focus exclusively on mutual funds and earn commission income. For comprehensive financial planning, an RIA licence is the better choice. If your interest lies in stock research and providing market recommendations, the RA licence would be the most suitable.

To build an initial client base, Amol Joshi, an MFD and founder of PlanRupee Investment Services, advises beginner MFDs to start by reaching out to friends and family. As they grow, organising investor awareness programmes and leveraging networking opportunities can help attract more clients.

RIAs, however, face a unique challenge: many clients are hesitant to pay fees directly for financial advice, as they are accustomed to commission-based structures that don’t feel like an out-of-pocket expense.

Vivek Rege, an IA and founder of VR Wealth Advisors, notes that most aspiring RIAs already have a network or some experience in the field. “It’s better to get some experience first by working in a related area or under an RIA for a while and then take the license,” he suggests.

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For RAs, building authority in the market is critical to selling their services. Srikanth Meenakshi, co-founder of Prime Investor, recommends establishing credibility by creating blogs or social media content. “Start by posting blogs or social media posts and hopefully convert them into subscribers in the future,” Meenakshi advises.