Big Benefit For Research Advisors and Investment Advisors: SEBI Proposes One-Year Advance Fee

The Securities and Exchange Board of India on Wednesday proposed to allow investment advisors and research analysts to charge advance from their clients for a period not exceeding one year.

The one-year advance fee can be taken from individual clients and Hindu Undivided Families, as per SEBI's proposal. However, institutional clients, accredited advisors and individuals operating through proxy advisors will have their fee worked out via terms decided in their bilateral contracts.

Furthermore, the advance fee can be taken from individual and HUF clients only if they agree.

For investor protection, SEBI has also proposed that if a client terminates the services of an IA early, they can claim a refund for the unused period. However, the IA will be eligible to charge a breakage fee in this situation equivalent to a quarter's fee. Meanwhile, in such a situation, the RAs cannot claim a breakage fee.

These proposals will remain open for public comments till Feb. 27, 2025.

Currently, IAs can charge advance fees for a maximum of six months, while RAs can charge for three months. These rules were implemented in April 2021 for IAs and December 2024 for RAs under the SEBI (Investment Advisers) Regulations, 2013 and SEBI (Research Analysts) Regulations, 2014.

SEBI has received requests from RAs to relax the advance fee rule. They argue that limiting advance fees to three months discourages long-term recommendations and increases costs for both clients and analysts. IAs have also asked the market regulator to reconsider the rule.

The main reason SEBI limited advance fees was to protect investors. If investors paid too much in advance, they might feel stuck with an IA or RA, even if they were unhappy with the service.

However, RAs claim that shorter fee periods force them to focus on short-term recommendations to retain clients rather than offering long-term strategies. This might not be in the best interest of investors.