A new analysis reveals that a staggering 57 per cent of India's investment advisors are concentrated in just five major metro cities, raising critical questions about financial inclusion and the equitable distribution of financial market products across the nation.
Key Points
- 57 per cent of India's investment advisors are based in just five metro cities, highlighting a significant concentration problem.
- The declining number of registered investment advisors since 2021 is a concern for Sebi, as it could lead to unregulated 'finfluencers' filling the advisory gap.
- Lack of awareness about fee-based advice and a preference for product manufacturer-paid intermediaries contribute to the slow spread of advisors outside metros.
- The compliance burden, particularly for advisors with fewer clients, can be a deterrent, suggesting a need to review regulatory requirements based on scale.
- Sebi is reviewing the regulatory framework for MF Distributors and Investment Advisors to harmonise overlaps and is implementing a common advertising code and guidance platform.
Securities and Exchange Board of India (Sebi) chairman Tuhin Kanta Pandey recently remarked on the declining number of investment advisors of late.
A closer look at regulatory disclosures highlights another aspect of the matter.
It shows there is also a concentration problem with regard to where the existing advisors are based.
The majority of them (563 of 995, or 57 per cent) are located in five metro cities, shows a Business Standard analysis of the Sebi data.
There are 432 for the rest of India, which is 7,933 towns and around 600,000 villages, according to the last census in 2011.
The number of investment advisors was 1,341 in 2020-21.
This has implications for the spread of financial-market products and inclusion beyond larger cities; mutual funds, for example, have only 19 per cent of assets coming from beyond the top 30 cities.
Challenges in Advisor Distribution
"It is a matter of concern that the number of registered investment advisors has declined since 2021.
"As India's investor base expands rapidly, our market needs more regulated advisors.
"Otherwise, the gap will be filled by unregulated voices --like finfluencers -- who present opinion as expertise and speculation as strategy," Pandey said in his March 16 speech.
Mumbai accounts for the largest number (288) followed by Bengaluru (138), Delhi (69), Chennai (44), and Kolkata (24). Part of the slow spread is said to be lack of awareness of the advantages of fee-based advice.
"Clients have been used to a model where the intermediary is paid by the product manufacturer [mutual fund (MF) or insurance company, for example] rather than the investor.
This model can create conflicts of interest and investors can end up buying products that are not in their best interests.
There has been a gradual transition to fee-based investment advice, where the investor pays the intermediary and avoids this conflict.
Khushboo Dhanuka, an investment adviser registered in Guwahati, told Business Standard the transition to fee-based investment advice had taken off quicker in bigger cities where the demographics favoured a changing environment.
"Working professionals are more open to these changes … Most of my clients are online and from metros," she said.
Regulatory Framework and Future Steps
Maxie Jose, a Sebi-registered investment adviser in Kochi, is of the view that metros have more advisors because of a greater mass of investors with adequate investable assets and greater knowledge and awareness of the advantages of fee-paying investment advice.
"We still don't have people with a fee-paying attitude," said Jose, who works with a select number of companies and high networth individuals.
The compliance burden in the absence of scale can also be a deterrent for advisors, Jose suggested.
For example, he pointed out website-accessibility audits were mandatory, which may be an additional cost for advisors with a handful of clients.
One way to avoid prohibitive compliance costs could be to further examine whether the regulatory burden can be reduced, based on the number of clients and assets under management, according to Jose.
Sebi regulations provide for different requirements based on clients in some instances.
For example, deposit requirements for those with up to 150 clients is Rs 1 lakh compared to Rs 10 lakh for those with over 1,000 clients.
"A working group has been set up to review the extant regulatory framework of MF Distributors (MFDs) and harmonise overlap, if any, between MFDs and IAs (investment advisors)," Pandey had added.
The regulator also mentioned other steps including a common advertising code for all intermediaries, and a platform for regulatory guidance for investment advisors.
