For years, India’s financial services industry operated in a grey zone where financial advice and product sales often went hand in hand. Investors seeking objective advice often found themselves steered toward commission-generating products, a structural conflict of interest hard-wired into traditional financial services groups.
The problem was structural. When the same financial group advises clients and earns commissions from selling financial products, conflict of interest are inevitable. There was an absence of a unified, dedicated framework governing individuals and entities engaged in offering financial advice. Prior to 2013, investment advice in India was largely unregulated or loosely tied to product distribution, creating inherent conflicts of interest where advisors could covertly prioritize commission-driven products over the actual financial well-being of their clients.
The introduction of the SEBI (Investment Advisers) Regulations, 2013 marked a turning point. By establishing a formal framework for investment advice, SEBI sought to address conflicts of interest, strengthen transparency, and put investors’ interests at the center of the advisory relationship.
By defining terms such as ‘investment advice‘ and ‘investment adviser,’ SEBI clearly delineated the distinct duties and liabilities of each market participant, under Section 2 of the aforementioned regulations.
The Core Principle: Separate Advice from Sales
While Section 6 of the Regulations sets forth the eligibility criteria, the SEBI Master Circular outlines the specific qualification and certification requirements for Investment Advisers. At the heart of SEBI’s regulatory framework is a strict doctrine: a client cannot simultaneously receive both advisory and distribution services within the same group entity. The regulations impose segregation requirements on non-individual investment advisers operating within groups that also undertake distribution activities. The objective is to prevent the same client from being served simultaneously through advisory and distribution arrangements in a manner that creates conflicts of interest.
Under the rules, non-individual investment advisers must maintain client-level segregation at the group level. This means a client must be clearly categorized into one of two mutually exclusive segments of the business:
• Advisory Clients: Clients who pay for investment advice under an advisory arrangement, subject to the applicable restrictions on commissions and distribution-related consideration.
• Distribution Clients: Clients who access financial products through a distribution relationship, where the distributor may earn commissions or other permitted compensation but does not charge advisory fees in a manner prohibited by the regulations.
This separation is not merely a matter of paperwork. Applicable client-level and group-level restrictions determine how firms structure these relationships, onboard clients, and manage existing investments.
The objective is clear: Investors should know whether they are paying for advice or accessing a product-distribution service and the distinction must be meaningful in practice.
Structural Partitions and Corporate Compliance
Section 15 of the Regulations outlines the general obligations and statutory responsibilities applicable to Investment Advisers. SEBI’s approach goes beyond disclosure. It seeks to address the conflicts that arise when advisory and distribution businesses operate under the same corporate umbrella. For financial groups offering multiple services, compliance can involve several structural and operational safeguards:
• Separately Identifiable Departments: Corporate applicants proposing to offer investment advisory must house these services within a clearly partitioned department, division, or independent subsidiary.
• Strict Naming Conventions: To eliminate brand confusion for retail investors, any entity or division providing investment advice must explicitly include the words “Investment Adviser” in its registered corporate title.
• Arms-Length Operations: Multi-service groups must maintain a rigid arms-length distance between advisory desks and other verticals like institutional broking or asset manufacturing, proactively disclosing any potential conflicts of interest directly to the client.
A firm cannot rely on disclosure alone to resolve every conflict. Its operating model must also support the independence of its advisory services.
Structural Separation is Non negotiable
The push for arm’s length separation addresses a structural flaw rather than individual intent. When an adviser also operates a distribution or brokerage business, inherent financial incentives naturally tilt recommendations toward products that yield high commissions or trading volumes—regardless of whether they fit the investor’s goals or not. SEBI’s framework ensures that the fiduciary duty takes precedence over corporate revenue targets.
Putting Policy into Practice: How Financial Groups structure their businesses
Regulatory compliance is only one part of the story. Large financial groups must also decide how to organize their businesses, manage competing revenue streams, and communicate their service models to clients.
Several prominent financial institutions illustrate different approaches to separating or distinguishing wealth management, advisory, distribution, and other financial services.
Few of the institutions who have incorporated this structure are as follows:
(1)Kotak Mahindra Bank and Kotak Private Wealth
Kotak Mahindra Bank functions as one of India’s major full-service private sector banking and financial services conglomerates. It segments its operations into distinct subsidiaries, separating retail/corporate banking from Kotak Wealth Management (Kotak Investment Advisors / Kotak Private Wealth), which operates as a specialized advisory arm handling high-net-worth (HNI) and ultra-high-net-worth individuals.
(2)Morgan Stanley and Morgan Stanley Wealth Management
Morgan Stanley separates its institutional securities and investment banking divisions from its consumer-facing Morgan Stanley Wealth Management arm. This division was done to create a focus on high-net-worth advisory.
(3)Edelweiss Group and Nuvama Wealth Management (formerly known as Edelweiss Wealth Management)
Edelweiss Financial Services Limited historically housed its wealth and advisory segments alongside its lending and asset management arms. To scale effectively and separate mainstream financing from dedicated client advisory, the group spun off its wealth management division.
(4)IIFL Holdings and 360 ONE WAM (formerly known as IIFL Wealth)
Originally part of the umbrella IIFL (India Infoline) group, the wealth advisory, asset management, and distribution arms were completely demerged from the financing/broking business. The wealth management arm was rebranded as 360 ONE WAM, operating as a pure wealth advisory firm.
Beyond Compliance: Building Investor Trust
SEBI’s Investment Advisers Regulations, 2013, established an important foundation for distinguishing professional investment advice from product distribution. Subsequent amendments and regulatory measures have continued to shape the obligations of registered advisers and the way conflicts of interest must be addressed.
The real test, however, lies in implementation. Clear client classification, appropriate fee arrangements, effective segregation, and transparent disclosures must work together to protect investors in practice. With these regulations, SEBI took efforts to make a robust regulation for investment advisers and protection of the investors at large.
For detailed information on the above, kindly refer the below:
• SEBI (Investment Advisers) Regulations, 2013
• Master Circular by SEBI for Investment Advisers
(1) https://invsify.com/blog/best-wealth-management-services-in-india#:~:text=Kotak%20Private%20Wealth%20is%20the%20wealth%20management,estate%20planning.%20*%20Insurance%20and%20liability%20management
(2) https://www.morganstanley.com/about-us-ir/subsidiaries
(3) https://www.nuvama.com/about-us/#:~:text=We%20are%20a%20fully%20integrated%20platform%20that,management%2C%20asset%20management%2C%20capital%20markets%20and%20advisory
(4) https://www.360.one/about-us
Leave a Reply