Regulatory boobytraps: Investment advisers must have Rs30 million equity

By Kazim Alam, The Express Tribune

KARACHI: Other than having integrity, competence and no conflict of interest, what else do you need to become a registered investment adviser in Pakistan?

Under the prevalent regulatory regime for investment advisory services in the country, a person must have a minimum equity of Rs30 million, even if the setup is a one-man band doing a job that involves no deposit-taking activity. No wonder, a large number of finance professionals end up working for big business houses for their entire lives, foregoing their entrepreneurial ambitions.

Investment advisers give companies as well as individuals their opinion, either directly or through their reports, about the value of securities for compensation. They charge a fee that is calculated as a percentage of the value of the client’s total investment. Besides that, sometimes they also charge an additional fee if the return on the client’s investment is higher than the industry-wide benchmark.

However, the number of dedicated investment advisory firms has been low in Pakistan mainly because of a high minimum equity requirement. As on June 30, 2012, there were only 22 registered investment advisory companies in the country with total assets of Rs44 billion. Their share in total assets of the financial sector was roughly 0.5% at the end of last fiscal year.

“Many people are doing investment advisory in their individual capacity, but they don’t have licences. They operate under informal arrangements with their clients and as such there is no regulatory check on them,” said Elixir Securities Head of Research Azfer Naseem while speaking to The Express Tribune on Saturday.

“If I’m advising a client who has about Rs2.5 million, it makes no sense to get a licence for Rs30 million,” he added.

Naseem says many brokers do investment advisory on a regular basis, but they do not charge their clients against it. “They can’t charge a fee for investment advisory, as their books are properly audited every year. So they have no option other than foregoing their revenues,” he said.

According to a recent report of the Securities and Exchange Commission of Pakistan (SECP) – the regulator of investment advisory services in the country – investment advisory activities are being pursued by a number of entities, including brokerage houses, insurance companies, etc without obtaining requisite licence. Moreover, under the prevailing regime, brokerage houses cannot apply for an investment advisory licence unless they set up a separate entity for it.

The SECP has recently proposed that the capital requirement for investment advisory services should be variable and depend on a company’s “scope of activity”.

Unlike the prevalent regime that prescribes a uniform capital requirement for a cluster of investment advisory services, the SECP has now proposed that the capital requirement be brought down from Rs30 million to Rs2 million for limited-scope companies that engage in advising their clients only. For full-scope companies that advise their clients through portfolio management and private fund management, however, the capital requirement remains unchanged.

“If approved, the proposed downward revision of minimum capital requirement is definitely going to encourage finance professionals to set up their own advisory firms,” Naseem says, adding the proposed move will also help stem the tide of brain drain in Pakistan’s financial services sector.

But will there be enough clients? Naseem says there is no shortage of eligible investors. “Going by the number of luxury cars on the roads of Karachi, I’d say finding enough people with Rs5 million each to invest is not a big deal,” he says, referring to the SECP’s criterion for an eligible investor.

Published in The Express Tribune, March 24, 2013.

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