What an investment adviser owes you

Chapter 4 established that personalised advice triggers a stronger set of duties than research does. This chapter is those duties, from the text.

The fiduciary duty

Regulation 15(1): an investment adviser "shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise."

"Fiduciary" is the strongest standard in commercial law. It means your interest comes before theirs, not alongside it. Compare it with the standard a salesperson is held to, which is roughly that the thing be fit for sale and described honestly. A fiduciary cannot recommend the second-best option because it pays them more. A distributor can.

Note also "as and when they arise" — a conflict disclosed at the start of the relationship does not cover one that appears in year three.

The part that actually works

Chapter 3 argued that disclosure is weak and structural remedies are strong. Regulation 15(2) is the structural remedy:

An investment adviser shall not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided.

Read what that eliminates. No commission from the fund house. No trail. No payment from the insurer. Nothing from anyone except you, on anything they advise you about. The conflict is not disclosed, managed or mitigated — it is removed, because the only party who can pay the adviser is the party whose interest the advice is supposed to serve.

This single sentence is the most important one in the subject, and it has a practical corollary: if someone is advising you and not charging you, they are being paid by somebody else, and they are therefore not acting as your investment adviser. They may be a perfectly legitimate distributor. They are not held to regulation 15.

Regulation 15A confirms the direction of payment: an adviser "shall be entitled to charge fees for providing investment advice from a client", in the manner specified by the Board. The permitted manner and any limits are set by SEBI circular rather than in the regulation itself, so check the current circular before relying on a specific figure.

Separation where the firm does both

Regulations 15(3) to 15(5) handle the firm that advises and also sells:

• it "shall maintain an arms-length relationship between its activities as an investment adviser and other activities"
• where it is engaged in other activities, it "shall ensure that its investment advisory services are clearly segregated from all its other activities"
• any conflict between the advisory activity and the others "shall be disclosed to the client"

The intent is that the advisory side cannot be an acquisition channel for the distribution side.

Risk profiling: regulation 16

This is more demanding than most people realise, and it is specific. The adviser must obtain:

Required information
Age
Investment objectives, including the time for which they wish to stay invested and the purposes of the investment
Income details
Existing investments and assets
Risk appetite and tolerance
Liability and borrowing details

Then it must have a process for assessing the risk the client is "willing and able to take" — both words matter, because willingness is a preference and ability is a fact — including:

• "assessing a client's capacity for absorbing loss"
• "identifying whether client is unwilling or unable to accept the risk of loss of capital"
• "appropriately interpreting client responses to questions and not attributing inappropriate weight to certain answers"

And on the instrument itself: where tools are used they must be "fit for the purpose" with limitations identified and mitigated; the questions must be "fair, clear and not misleading", not vague, not using double negatives, not in language the client may not understand, and "not structured in a way that it contains leading questions."

Finally the risk profile must be communicated to the client after the assessment, and the information and assessment updated periodically.

Suitability: regulation 17

Profiling is the input; suitability is the obligation. The adviser must ensure that all investments advised on are "appropriate to the risk profile of the client", that it has a documented process for selecting investments based on the client's objectives and financial situation, that it understands the nature and risks of what it selects, and that it has "a reasonable basis for believing" the recommendation meets the client's objectives and that the client "is able to bear any related investment risks".

"Documented" and "reasonable basis" are the enforceable words. They convert a judgement into something a complaint can be measured against: either the process exists on paper or it does not.

Working the problem

The question was: "Would you not be uncomfortable accepting some short-term volatility in exchange for higher long-term returns?" Answered yes, equity fund recommended.

Failures in the question itself, against regulation 16(d):

• It is a double negative. "Would you not be uncomfortable" — the regulation names this explicitly. Many people answering "yes" will not be sure what they have agreed to.
• It is leading. It supplies the reward ("higher long-term returns") inside the question about the risk, and the regulation requires questions not be structured to contain leading questions.
• "Some volatility" is vague. A fall of 10% and a fall of 50% are both "some". The regulation requires questions not be vague.
• It frames the risk as volatility rather than as loss, while the regulation separately requires identifying whether the client is unwilling or unable to accept loss of capital. Those are different questions and only one was asked.

Failures in what was collected, against regulation 16(a) and (b): one question cannot establish age, objectives and horizon, income, existing assets, or — most seriously — liabilities and borrowings. Someone with an expensive personal loan may be unable to bear equity risk however willing they feel, which is the capacity-to-absorb-loss limb. Nothing here distinguishes willing from able.

Failures in weighting, against regulation 16(b)(iii): recommending equity on the strength of a single answer is the definition of "attributing inappropriate weight to certain answers."

Failures after the answer: no evidence the risk profile was communicated back to the client as 16(e) requires, and nothing establishing the documented selection process or the "reasonable basis" that regulation 17 demands — in particular, nothing connecting this fund to this client's stated objectives rather than to the category "people who said yes".

The honest qualification: an unsuitable recommendation is not automatically a breach, because a suitable product can be arrived at through a bad process and an unsuitable one through a good process. What the regulations police is the process, and on the facts given there is no process to examine.

How to check you are getting this

1. Search the SEBI register for the registration number, on SEBI's own site, not the firm's.
2. Ask who pays them, and for what. If the answer is anyone other than you, regulation 15(2) is not operating.
3. Ask for the risk profile in writing. It is required to be communicated to you.
4. Ask why this product rather than the obvious cheap alternative. The reasonable-basis standard means there should be an answer about you, not about the product.
5. Notice whether your liabilities were asked about. Advisers who never mention your loans are not doing regulation 16.

The point

A SEBI-registered investment adviser owes you a fiduciary duty, ongoing conflict disclosure, a risk profile built from your age, objectives, income, assets, risk tolerance and borrowings, and a documented, reasoned basis for believing each recommendation suits you. The provision that does the real work is regulation 15(2), which forbids them taking payment from anyone but you on what they advise — so an adviser who does not charge you is being paid by someone else and is not operating under that rule. The regulations also police the questionnaire itself, banning vague, leading and double-negative questions and the over-weighting of single answers.