SEBI Sets Up Panel to Review Advisory and Distribution Frameworks

The capital market regulator, the Securities and Exchange Board of India (SEBI) has constituted a working group to examine and potentially resolve the long-standing friction between mutual fund distributors (MFDs) and registered investment advisers (RIAs), according to people familiar with the matter. The panel was formed late last week and is yet to formally commence discussions.

Review of Overlapping Roles and Regulations

The working group has been tasked with reviewing the scope of investment advice, regulatory overlaps between the two frameworks, alignment of compliance obligations, and possible changes to licensing structures. The move follows growing concerns that SEBI’s existing conflict-of-interest framework for investment advisers no longer reflects how advisory and distribution services are actually delivered on the ground.

Advisory vs Distribution: Rules and Reality

Under current regulations, RIAs can provide investment advice and charge clients a fee but are prohibited from earning commissions on the products they recommend. Mutual fund distributors, on the other hand, earn commissions from asset management companies and are expected to confine themselves to product distribution, offering only limited or “incidental” guidance.

In practice, however, these distinctions have increasingly blurred. Distributors often accuse advisers of pushing product recommendations that resemble sales, while distributors argue that investors seek end-to-end guidance without differentiating between advisory and distribution models.

Push for a Hybrid Framework

The rigid regulatory silos are increasingly viewed as creating distinctions driven more by labels than by investor outcomes. This has triggered industry discussions around the need for a third, hybrid framework, one that would allow distributors to offer a defined level of advisory services under stricter disclosure and conduct norms, without requiring a full transition to the RIA model.

Scale Mismatch Raises Red Flags

Scale remains a central concern behind the review. India has nearly three lakh mutual fund distributors, including bank staff and institutional sellers, catering to a mutual fund investor base of close to six crore individuals. In contrast, the number of SEBI-registered investment advisers stands at around 1,000—a minuscule figure relative to the market’s size and the roughly 22 crore demat accounts in the system.

Limits of the Fee-Only Model

Market participants said that relying solely on the fee-only RIA framework to expand access to quality advice is unlikely to keep pace with India’s rapidly growing retail participation. Investor behaviour remains relationship-driven and highly fee-sensitive, particularly beyond metro centres, making commission-based distribution the primary entry point for financial products.

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Exploring a Calibrated Solution

The working group is expected to examine whether a balanced framework can combine the wide reach of distributors with the fiduciary safeguards embedded in the advisory model. Potential measures under consideration include enhanced commission disclosures, clearer boundaries around permissible advice, higher qualification standards, and a licensing structure that allows advisory activity without full RIA registration.

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