Can you invest in model portfolios offered by analysts?
Premium- Most of the providers of curated portfolios continue to provide services without change
Have you been investing in ready-made curated portfolios? You may want to check the type of registration the managers offering the curated portfolios have with market regulator Sebi.
Those registered as research analysts (RAs) cannot offer model portfolios. This is one of the observations of Sebi’s recent settlement order dated 6 May, in respect of Amit Mohan Jeswani (proprietor of Stallion Asset). As per the order, selling model portfolios to clients or investors is against the defined responsibility of research analysts as mentioned in Sebi (Research Analysts) Regulations, 2014.
This order is likely to impact all the curated portfolios being offered by research analysts in the market.
Smallcase and WealthDesk, both of which offer baskets of stocks based on a theme or an idea, have products created by both RAs and registered investment advisors (RIA).
Here is what investors should know about the regulations on research analysts.
Different interpretations
Experts are divided on Sebi’s view in the settlement order that model portfolios cannot be offered by RAs. Model portfolio means a portfolio of securities with the allocation of weights, where investors can simply follow the portfolio, according to Kruti Gogri, a company secretary, specializing in Sebi regulations.
“A research analyst’s role is to research and give recommendations on a particular security. Offering a model portfolio, which consists of multiple securities, is covered under the definition of RIAs and not RAs" added Gogri. On the other hand, those against the stance taken by the regulator said that the definition explicitly doesn’t exclude RA from offering model portfolios. “Many of the research analysts have already mentioned in their business plan submitted to Sebi at the time of registration that they are going to offer model portfolios. A view like this from the regulator, now, is a bit odd," said Sandeep Parekh, managing partner, Finsec Law Advisors
The difference in interpretation of the law stems from an overlap in the responsibilities of RAs and RIAs. Moin Ladha, partner, Khaitan & Co, said, “There is an overlap between the research analysts and investment advisors’ regulations. While the role of a research analyst is limited to making recommendations with respect to specific stocks, when they transgress this domain, it takes the form of a specific advisory form."
What investors must do?
A settlement order is issued when the parties in the case decide to settle the case without admitting or denying the findings of fact or the conclusion of law. Thus, the settlement order is not binding on others. However, it reflects the regulator’s view on the subject.
Thus, a clarification from the regulator is expected in this regard, as per the industry experts. Most of the providers of curated portfolios continue to provide the services without any change.
“All Smallcase partners continue to offer their services to their clients. There is no impact on the platform’s services," Smallcase said in its response to a Mint query. Similar is the response from WealthDesk. However, a few players such as Omkara Capital (founded by Varinder Bansal) have stopped publishing portfolios on Smallcase for new subscriptions. Bansal confirmed on Twitter that old clients will continue to get the service. “For existing and new investors who wish to invest through such platforms, it is probably better to wait for clarity from Sebi," said Manshoor Nazki, partner, IndusLaw.
Since there is no confusion about the services offered by RIAs, one can consider investing in portfolios offered by RIAs/PMS until clarity emerges. “For the new investors it would be advisable to check that the advisor has registration under RIA and not RA," added Sumit Naib, director- regulatory, Nangia Andersen LLP.
“The best way to check registration about a registered intermediary is to check on Sebi’s website," added Gogri.
Note that a few investment portfolios in the market are also offered by entities registered as stockbrokers/RAs and stockbrokers (for e.g., StockBasket). The settlement order, however, is silent about model portfolios offered by such entities.