Pump and dump scams are quite common in the Indian financial markets whereby a large player about to sell their share spreads rumours about a rise in the prices of the stock through anonymous tips spread across the social media and when unsuspecting traders do buy the stock, they quickly offload their holdings.
Therefore the Securities and Exchange Board of India (SEBI) has released several rules and regulations related to the types of sources that are fit for us to take financial advice from.
- The notice released on 14th October 2020, has cautioned investors from taking advice from financial advisors who are not legitimate – especially to not take unsolicited investment tips.
- The SEBI Investment Advisers Regulation of 2013 has also set out the framework for investment advisory agents and firms.
Who to call for investment advice then?
The following are important credentials that your choice of investment advisor should have:
- SEBI Registered Investment Advisor (RIA) – SEBI mandates that every entity/individual giving financial advice should be registered with it. Therefore it is important to have a SEBI registered investment advisory agent to obtain financial advice from. The list of SEBI Registered Investment Advisors is given on the SEBI website itself.
- Certified Financial Planner (CFP) by the Financial Planning Standard Board of the USA – It is a standard of expertise in financial planning that is recognised globally for personal finance. You can find the list of CFPs in India from the FPSB directory online.
Taking advice from such agents would mean having all your decisions that are financial certified and approved by an expert before you take those decisions.
Types of financial advisors
There are primarily three types of financial advisors based on their fee structure:
Flat fee only Financial Advisors –
They charge the consumer directly for their advisory financial plans and do not take any commissions on investment returns. There is no conflict of interest or further kickbacks involved. They are mandated by the SEBI to have the best interests of their clients in mind.
Fee based Financial Advisor –
Such planners not only charge the investor for the plans but also receive a further commission on the products or strategies recommended in the plan. This might be a source of a conflict of interest and hence is a cause for concern – therefore it is not approved by the SEBI investment advisor rules.
Distributors of Financial Instruments –
They distribute various financial instruments such as mutual funds, stocks etc. to their clients who are the investors. They receive fees and commissions on the trades they provide. However, they do not have any fiduciary responsibility towards their clients – this creates a conflict of interest.
Types of advisors to avoid
Usually there are certain signs that allow you, as an investor, to check if the financial advisor has either the best plan or or best interest in mind or not:
- Recommends strategies without first understanding your risk profile
- Keeps assuring guaranteed returns
- Promises to make you rich quick
- Tries to confuse you with jargon and complex financial products and strategies
Therefore, it is certain that it is imperative to take financial advice from only those sources that involve professional sources that are legitimate under the framework set by SEBI (e.g. SEBI Registered Investment Advisor) and who have your best interests in mind. If you have such an advisor already, try opening a demat account with a trusted online platform and start making your investments today.