Market regulator Securities and Exchange Board of India (SEBI) has issued a consultation paper proposing changes to the rules governing advance fees charged by Investment Advisers (IAs) and Research Analysts (RAs). The proposal aims to allow IAs and RAs to collect advance fees for up to one year.  

Under rules revised in 2020 and 2024, IAs can charge fees for no more than two quarters (six months), while RAs are restricted to one quarter (three months). These regulations were implemented to safeguard investors, ensuring they are not tied to long-term contracts with advisers or analysts, mainly if they are dissatisfied with the services provided. The intention was to offer investors the flexibility to switch without the burden of losing substantial fees.  

However, several research analysts have argued that the existing limitations hinder their ability to provide long-term advisory services. They contend that the three-month fee collection period encourages a short-term focus, as analysts feel pressured to deliver quick results to retain clients. This approach undermines the quality of strategic advice necessary for long-term investors who seek comprehensive insights over an extended period.  

While the original aim of the regulations was to protect investors, a potential concern with extending the advance fee period to one year is the risk of investors facing challenges in obtaining refunds if they choose to terminate the agreement early. However, the Association of Registered Research Analysts of India (ARRAI) has argued that refunds are typically processed within five to seven days, addressing concerns about delayed reimbursements.  

Under the existing framework, IAs and RAs are required to refund any unexpired portion of the fees if services are prematurely terminated. IAs are allowed to charge a breakage fee, but it is capped at one quarter’s fee. In contrast, RAs are prohibited from imposing any breakage fee.  

The proposed changes would apply solely to individual and Hindu undivided family (HUF) clients. For non-individual clients, accredited investors, and institutional clients, fee-related terms would continue to be governed by bilateral contractual agreements, offering greater flexibility, the market regulator says.