Description

SEBI allows Investment Advisers to charge fees up to 2.5% per annum on assets under pre-existing distribution arrangements when providing second opinions to clients.

Summary

SEBI has introduced ease of doing business measures allowing Investment Advisers (IAs) to provide second opinions to clients on assets held under pre-existing distribution arrangements with other entities. Previously, IAs were prohibited from charging AUA-based fees on such assets. The new provisions permit IAs to charge fees up to 2.5% of such assets’ value per annum, subject to annual disclosure and client consent regarding dual costs (advisory fees plus distributor consideration). This circular revises Clause 1.(iii)(f) of the Master Circular for Investment Advisers and is effective immediately.

Key Points

  • Investment Advisers can now charge AUA-based fees on assets under pre-existing distribution arrangements when providing second opinions
  • Fee limit capped at 2.5% of asset value per annum
  • IAs must obtain annual consent from clients acknowledging dual costs (advisory fees and distributor consideration)
  • Clients will incur both advisory fees to the IA and distributor consideration for such assets
  • Clause 1.(iii)(f) of the Master Circular for Investment Advisers has been revised
  • Change responds to industry association representations about restrictions on serving clients seeking second opinions

Regulatory Changes

The Master Circular for Investment Advisers has been amended. The revised Clause 1.(iii)(f) now states:

“For clients seeking second opinion on assets under pre-existing distribution arrangement with other entity, IAs may charge fee on the assets under pre-existing distribution arrangement under AUA mode, subject to a limit of 2.5% of such assets value per annum. IAs shall, on annual basis, disclose and seek consent from such clients that apart from the advisory fees payable to the IA, the clients will be incurring costs towards distributor consideration for such assets.”

Previously, any portion of Assets Under Advice (AUA) held under pre-existing distribution arrangements had to be deducted from AUA for fee calculation purposes, effectively preventing IAs from charging on such assets.

Compliance Requirements

  • Investment Advisers must:

    • Limit fees on assets under pre-existing distribution arrangements to maximum 2.5% per annum when providing second opinions
    • Disclose to clients on an annual basis that they will incur both advisory fees and distributor consideration
    • Obtain annual consent from such clients acknowledging the dual cost structure
    • Ensure compliance with revised clause of Master Circular for Investment Advisers

  • Investment Adviser Administration and Supervisory Body (IAASB) should note the regulatory change

  • Clients must provide annual consent after being informed of dual costs

Important Dates

  • Circular Issue Date: October 30, 2025
  • Effective Date: Immediately (from date of circular issuance)
  • Consent Requirement: Annual basis

Impact Assessment

Market Impact: This regulatory change expands the scope of services Investment Advisers can provide, allowing them to serve clients who want second opinions on existing investment portfolios managed through distributors. This could increase competition in the advisory market and provide investors with more comprehensive advisory options.

Operational Impact: Investment Advisers can now tap into a previously restricted market segment - clients with assets under distribution arrangements seeking independent validation. However, IAs must implement annual disclosure and consent processes to ensure compliance.

Investor Impact: Investors gain access to second opinions on their distributed assets but must be aware they will pay dual costs (both advisory fees and existing distributor charges). The 2.5% cap provides fee protection while the mandatory annual disclosure ensures transparency.

Compliance Impact: Moderate - IAs must update internal processes to track consent requirements annually and ensure fee calculations comply with the 2.5% cap for this specific category of assets.

Impact Justification

This circular introduces a regulatory change enabling Investment Advisers to charge fees on assets under pre-existing distribution arrangements when providing second opinions, limited to 2.5% per annum. It expands the scope of IA services but has moderate impact as it applies only to specific advisory scenarios.