Description

SEBI allows Investment Advisers to charge fees up to 2.5% per annum for providing second opinion on client assets under pre-existing distribution arrangements, subject to annual client consent and disclosure of dual costs.

Summary

SEBI has introduced ease of doing business measures allowing Investment Advisers (IAs) to provide second opinion services to clients on assets held under pre-existing distribution arrangements with other entities. Previously, IAs were prohibited from charging Assets Under Advice (AUA) based fees on such assets. The revised framework permits IAs to charge fees up to 2.5% per annum on these assets, subject to mandatory annual disclosure and client consent regarding dual costs (both advisory fees and distributor consideration).

Key Points

  • Investment Advisers can now charge AUA-based fees on assets under pre-existing distribution arrangements when providing second opinion services
  • Fee cap set at 2.5% of asset value per annum for such second opinion advisory services
  • Annual disclosure and consent requirement: IAs must inform clients they will incur both advisory fees and distributor consideration costs
  • Revises Clause 1.(iii)(f) of the Master Circular for Investment Advisers
  • Addresses industry representation that previous restrictions limited IAs’ ability to serve clients seeking second opinions
  • Provisions effective immediately upon issuance

Regulatory Changes

Clause 1.(iii)(f) of the Master Circular for Investment Advisers has been revised to read:

“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 AUA held by the client under pre-existing distribution arrangements was required to be deducted from AUA for fee charging purposes, effectively prohibiting IAs from charging fees on such assets.

Compliance Requirements

For Investment Advisers:

  1. Fee Limit Compliance: Ensure fees charged on assets under pre-existing distribution arrangements do not exceed 2.5% per annum
  2. Annual Disclosure: Provide clear disclosure to clients on annual basis regarding:
    • Advisory fees payable to the IA
    • Distributor consideration costs that clients will continue to incur on such assets
  3. Client Consent: Obtain annual consent from clients acknowledging understanding of dual cost structure
  4. Documentation: Maintain records of disclosures and client consents for regulatory compliance
  5. Service Scope: Clearly define second opinion services being provided on pre-existing distribution assets

For Investment Adviser Administration and Supervisory Body (IAASB):

  • Monitor compliance with fee limits and disclosure requirements
  • Ensure proper implementation of revised Master Circular provisions

Important Dates

  • Circular Issued: October 30, 2025
  • Effective Date: Immediately upon issuance (October 30, 2025)
  • Disclosure and Consent: Required on annual basis (ongoing compliance requirement)

Impact Assessment

Market Impact:

  • For Investment Advisers: Opens new revenue stream by enabling fee collection on previously restricted asset base; allows IAs to serve clients more comprehensively when second opinions are requested
  • For Investors: Provides flexibility to obtain independent second opinions on existing investments without necessarily changing distribution arrangements; however, results in dual cost structure (advisory fees plus distributor fees)
  • For Distributors: No direct impact on existing distribution arrangements; distributors continue to receive consideration on assets under their management

Operational Impact:

  • IAs need to implement systems for annual disclosure and consent documentation
  • Potential increase in advisory workload as clients may seek second opinions on broader asset base
  • Compliance teams must ensure fee calculations and disclosures meet regulatory requirements

Industry Impact:

  • Addresses long-standing industry representation about restrictions limiting service capabilities
  • Promotes ease of doing business for Investment Advisers
  • Enhances investor protection by facilitating access to independent advisory opinions
  • May lead to increased competition as IAs can now actively advise on clients’ full portfolio

Regulatory Authority: Circular issued under Section 11(1) of Chapter IV of SEBI Act, 1992 read with Regulation 15A of SEBI (Investment Advisers) Regulations, 2013.

Impact Justification

Medium importance as it introduces a new revenue opportunity for Investment Advisers while providing investors with second opinion options. Medium impact limited to IA industry participants and their clients seeking second opinions on existing investments.