The Securities and Exchange Board of India (SEBI) has constituted a working group to resolve the long-running dispute between mutual fund distributors (MFDs) and registered investment advisers (RIAs), according to people familiar with the development. The group was formed toward the end of last week and is yet to formally begin its deliberations.
The panel has been tasked with examining the scope of investment advice, regulatory overlaps between the two frameworks, alignment of compliance requirements and possible changes to licensing structures. The exercise follows concerns raised about the conflict-of-interest framework built into SEBI’s investment adviser regulations as the separation between advice and distribution no longer reflects the actual service on the ground.
RIAs are permitted to provide advisory services and charge clients a fee but are barred from earning commissions on products they recommend. In contrast, mutual fund distributors earn commissions from asset management companies and are expected to limit themselves to product distribution, offering only “incidental” guidance.
In practice, however, the lines have blurred. Investment advisers are often accused by distributors of recommending mutual fund products in ways that resemble sales, while distributors argue that investors seek holistic guidance and do not differentiate between advisory and distribution models. With years of market experience and close client relationships, many distributors effectively act as informal advisers, particularly in smaller cities and towns.
Hybrid structure
The regulatory silos have increasingly been seen as creating distinctions based more on nomenclature than on investor outcomes. This has led to discussions within the industry about the need for a third regulatory framework – one that allows distributors to offer a defined level of advisory services under tighter disclosure and conduct norms, without forcing a complete shift to the RIA model.
Scale remains a key concern driving the review. India has close to three lakh mutual fund distributors, including bank staff and institutional sellers, servicing a mutual fund investor base of nearly six crore individuals. By contrast, the number of SEBI-registered investment advisers stands at around 1,000, a tiny fraction relative to the size of the market and the nearly 22 crore demat accounts in the system.
Market participants said that relying solely on the fee-only RIA model to expand quality advice is unlikely to meet India’s rapidly growing retail participation. Investor behaviour remains relationship-driven and fee-sensitive, particularly outside metro centres, making commission-based distribution the dominant access point for financial products.
The working group is expected to explore whether a calibrated framework can combine the reach of distributors with the fiduciary safeguards of the advisory model. This could include tighter disclosures on commissions, clearer boundaries on permissible advice, upgraded qualification norms and a licensing structure that allows advisory activity without full RIA registration.
If the regulator moves toward a hybrid or harmonised structure, it could significantly expand the pool of individuals permitted to provide regulated advice, while attempting to reduce conflicts that have plagued the system for years.