Investment adviser regulations, and the small word that closed an industry.

In January 2013, the Securities and Exchange Board of India issued a regulation that, on its face, did very little. The (Investment Advisers) Regulations, 2013, declared that any person engaged in providing investment advice for consideration would have to register with SEBI. That is the sort of provision a regulator passes on a slow afternoon. The trouble was that "for consideration" turned out to mean something very specific, and "advice" turned out to mean something different from what an industry had spent twenty years calling it.

For most of the preceding decade, the country's financial product distribution had run on an unstated bargain. A mutual fund distributor would meet a client, suggest a fund, and earn a commission from the asset management company. The commission was paid by the AMC, but it was paid out of the fund's expenses, which were paid by the client. The distributor would refer to himself as a financial advisor on his visiting card; the client would refer to him as one in conversation; the AMC would refer to him as a distributor in its records. Three different names for one transaction, and nobody minded, because the commissions arrived on time.

The line that was drawn

The 2013 Regulations drew a line through the middle of this arrangement. A person who provided advice could not, in the same transaction, also distribute the product. The advisor would have to be paid by the client, in fees, directly. The distributor would have to disclose, in writing, that he was not an advisor. The commission economy was permitted to continue; the language used to describe it was not.

A regulator that cannot enforce a price control can sometimes enforce a vocabulary.

What followed was the slow, uneven settling of a market into two halves. Registered investment advisers — RIAs — became a small, fee-only profession, growing slowly. Distributors continued, larger and more numerous, but were required to call themselves what they were. The 2020 amendments tightened the line further: an individual RIA could not have more than 150 clients without converting to a corporate structure; client agreements had to be in a prescribed form; fees were capped.

An act of definition

It is tempting to read the Regulations as a failure, because most of the industry remains on the distribution side. It is more honest to read them as a successful act of definition. Before 2013, "advisor" meant whatever the speaker found convenient. After 2013, it meant a specific thing, registered with a specific regulator, paid in a specific way. The country still buys mutual funds the way it always did. It just no longer pretends the buying involved any advice.