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SEBI's 2025 circular permits Investment Advisors to charge up to 2.5% AUA-based fees for second-opinion advisory on distributed assets, with annual client consent requirements. Complete decodong of fee limits, disclosure mandates, and compliance obligations essential for NISM Series X-A: Investment Adviser Level 1 & NISM Series X-B: Investment Adviser Level 2 (NISM IA) exam preparation.
What limitation existed earlier regarding AUA-based fees
Earlier Limitation on AUA-Based Fees (SEBI Rule Explained): Under Clause 1.(iii)(f) of the SEBI Master Circular for Investment Advisers, IAs were barred from charging AUA-based fees on client assets already managed or distributed through another entity. These distributed assets had to be excluded from total AUA when calculating fees, restricting advisors from offering paid second-opinion or independent advisory services even at a client’s request.
What specific change has SEBI now introduced
SEBI now permits Investment Advisers to charge fees on assets under pre-existing distribution arrangements, provided the fee does not exceed 2.5% per annum of such asset value. This allows IAs to legally and ethically offer a second opinion to clients who already hold products distributed by another entity, without violating fee norms.
Key Ponts:
SEBI permits AUA-based fees up to 2.5 percent per year.
Applies to assets previously excluded due to distribution ties.
Strengthens client trust through regulated second-opinion advisor.
How does this affect NISM Investment Adviser exams (Level 1 & Level 2)
This circular directly impacts the syllabus areas related to fee models, conflict-of-interest management, disclosure norms, AUA calculation rules, fiduciary responsibilities, and regulatory compliance. Level 1 students need to understand how AUA-based fees work and when assets are included or excluded. Level 2 examines deeper application-level scenarios, such as dual-cost implications, second-opinion advisory models, and suitability assessments. The change also reinforces core principles: transparency, investor protection, and fair charging practices -key testing themes in both exams.
What disclosures and consent obligations must IAs now follow
IAs must disclose clearly and obtain annual consent from such clients, confirming that:
- The client will be paying advisory fees to the IA, and
- The client will continue to incur distributor consideration (commissions, trail fees, etc.) on those same assets.
This ensures transparency and prevents fee-related conflicts of interest.
Snapshot Summary: Simplified Overview of SEBI’s 2025 Change
- Earlier, IAs were not allowed to charge AUA-based fees on assets that a client held through an existing distribution relationship (e.g., mutual fund distributor).
- Industry raised concerns that this prevented clients from seeking an independent second opinion.
- SEBI now permits IAs to charge a fee on such assets up to 2.5% per annum.
- Mandatory annual disclosure and client consent must be obtained.
- Clause 1.(iii)(f) of the Master Circular for Investment Advisers stands revised.
- Circular is effective immediately.
Background & Context: Why This 2025 Circular Was Issued
What Is the Regulatory Purpose Behind SEBI’s 2025 Circular
SEBI intends to enhance ease of doing business for Investment Advisers while improving investor access to unbiased advice. Previously, fee rules unintentionally discouraged clients from seeking a second opinion on assets purchased elsewhere.
Understanding Key Compliance Gaps & Market Issues: What Problems Did SEBI Aim to Address
- IAs could not charge on such assets > discouraged from giving second opinions.
- Clients lacked access to expert review of distributed products.
- Industry associations highlighted genuine investor needs.
How This Circular Supports SEBI’s Broader Regulatory Objectives
SEBI’s 2025 circular aims to strengthen investor protection by mandating transparent fee structures and reducing potential conflicts of interest that may lead to mis-selling. These measures collectively enhance the credibility and trustworthiness of the overall investment advisory ecosystem, ensuring fairer and more accountable advisory practices.
Key Points:
Strengthening investor protection
Maintaining transparency in fee structures
Avoiding conflict of interest and mis-selling
Enhancing advisory ecosystem credibility
Clause-by-Clause Breakdown: SEBI’s Circular Explained Step by Step
Clause 1 Overview: What the Old Rule Said
Investment Advisers were prohibited from charging AUA-based fees on assets already under pre-existing distribution arrangements, which had to be excluded from the AUA calculation. i.e:
- Assets under pre-existing distribution arrangements must be excluded when calculating AUA-based fees.
- IAs were prohibited from charging on such assets.
Simple Meaning: Investment Advisers (“IAs”) could not earn AUA-based fees on assets sold by another distributor.
Clause 2: How the Industry Responded to SEBI’s Rule (Industry Feedback & Demands)
Industry associations requested SEBI to allow charging fees for second-opinion advisory on such assets since clients desire an unbiased review and guidance.
Simple Meaning: Industry said: Clients want second opinions -let us advise and charge for it.
Clause 3 -What SEBI Finally Decided (SEBI’s Final Call on Fee Rules)
Investment Advisers (“IAs”) may charge fees on such assets, capped at 2.5% of asset value per year. IAs must:
- Make clear disclosure
- Obtain annual client consent, stating that the client will incur both IA advisory fees and distributor commission.
Simple Meaning: Investment Advisers (“IAs”) can charge, but only up to 2.5% and with full disclosure + annual client consent.
Clause 4 - What the Revised Master Circular Says (Updated Wording in SEBI’s Master Circular)
The earlier restriction (Clause 1.(iii)(f)) is officially replaced with a new rule allowing the 2.5% fee and consent requirement.
Clause 5 - Explained: When the New Rule Takes Effect
Circular becomes applicable immediately.October 30, 2025
Clause 6-7: Understanding SEBI’s Legal Grounds and Where It’s Published (Statutory Authority & Availability)
Issued under SEBI Act Section 11(1) & Regulation 15A of IA Regulations, 2013.
Available under Legal > Circulars on SEBI website
Exam Relevance Mapping: Why This Circular Matters for NISM IA Exams
Applicable to Primary Exam(s):
- NISM Investment Adviser Level 1 (Fee models, AUA, ethics, conflict of interest, duties of IAs)
- NISM Investment Adviser Level 2 (Application-level scenarios, disclosure obligations, suitability, compliance procedures)
Key Exam Topics Impacted
- AUA-based fee computation
- Fee caps and regulatory boundaries
- Second-opinion advisory framework
- Fiduciary duties & transparency norms
- Distributor vs Adviser cost structure
- Revision of Master Circular clauses
How This Circular May Appear in Exam Questions (Question Styles Expected for NISM IA Exams)
- Direct MCQs on fee cap (2.5%)
- Caselets: Client wants second opinion -can the IA charge?
- True/False: Assets under pre-existing distribution must be excluded
- Scenario-based suitability or fee disclosure questions
- Matching/Indexing: SEBI rule > Revised provision
What This Means for the Investment Advisory? (Industry Impact & Real-World Application)
The SEBI circular enables Investment Advisers to serve clients who previously invested through distributors, offering independent reviews while requiring annual consent tracking for compliance. This update prompts advisory firms to adjust pricing and workflows, enhancing transparency around dual costs and strengthening investor protection through better-informed decision-making.
Key Points:
- IAs can now serve more clients who have earlier invested via distributors.
- Clients gain access to independent reviews of distributed products.
- Compliance teams must track consent annually.
- Advisory firms may revise pricing models and workflows.
- Enhances transparency on dual cost implications (distributor commission + advisory fee).
- Strengthens investor protection through informed decision-making.
Why This Matters for NISM-X-A & NISM-X-B Aspirants
- Helps NISM candidates understand practical advisory models
- Reinforces fiduciary duty, suitability, and transparency concepts.
- Illustrates SEBI’s approach to investor protection and conflict management.
- Bridges theoretical rules with real-world advisory scenarios.
- Provides clarity on fee caps - a commonly tested exam area.
Key Takeaways (Quick Revision Sheet)
- IAs can now charge AUA fees (max 2.5% p.a.) on assets under pre-existing distribution
- Second opinion advisory is officially permitted with annual consent
- Mandatory disclosure: Client pays both advisory fee and distributor costs.
- Clause 1.(iii)(f) stands revised
- Circular effective immediately.October 30, 2025
Updates, Amendments & Implementation Timeline
- Revision to Master Circular effective from October 30, 2025
- All IAs must modify fee frameworks and disclosure documents right away
- Annual consent becomes part of compliance calendar
Sample Questions (Exam Prediction Set)
Q1:
Under the revised rule, what is the maximum fee IAs can charge on assets under pre-existing distribution?
Answer: 2.5%
Q2:
Which document must be updated annually for such clients?
Answer: Client consent for dual charges
Q3:
Earlier, why were such assets excluded from AUA?
Answer: Because SEBI prohibited charging AUA fees on pre-distributed assets
Scenario-Based Question
A client invested in mutual funds through a distributor but wants a second opinion from an IA. Can the IA charge AUA fees?
Answer:Yes, up to 2.5% p.a., with annual disclosure and consent.
NOTE: (In actual exam (NISM -X-A) this may include questions that test conceptual understanding and basic calculation-based scenarios. However in the NISM-X-B module, such questions might appear within lengthy case studies designed with subtle twists to make candidates overlook this small yet critical rule while calculating the final answer.
Concept Testing Question
What risk does SEBI aim to resolve through mandatory disclosure?
Expected Answer: Fee transparency and potential conflict of interest.
FAQs (Learner Clarification)
Q1: Can an IA earn trail commission and advisory fee both?
A: No. Investment Advisers must strictly adhere to the “no commission” rule prescribed under the SEBI (Investment Advisers) Regulations, 2013. This means they cannot receive distributor commissions, trail fees, or any third-party remuneration while also charging advisory fees, as this would create a conflict of interest. Distributor costs, if any, are solely borne by the client under their distribution relationship
Q2: Why annual consent and not one-time?
A:Annual consent is required to ensure continuous transparency because distributor charges (such as trail commissions) are recurring costs that continue every year. By obtaining consent annually, SEBI ensures that clients remain fully aware of the dual cost structure and are given an updated opportunity to evaluate whether they wish to continue receiving second-opinion advisory services.
Q3: Does this apply to all advisory engagements?
A: No. This relaxation applies only to clients who seek a second opinion on assets that were purchased under a pre-existing distribution arrangement with another entity. For all other advisory engagements -particularly those where the IA has advised the product -normal AUA rules and fee restrictions apply, without this special 2.5% provision.
Q4: Can the IA charge more than 2.5% if the client agrees?
A: No. The 2.5% per annum cap is an absolute regulatory limit imposed by SEBI, and neither the IA nor the client can override it through mutual agreement. Even if the client is willing to pay more, the IA must comply strictly with the fee ceiling to avoid regulatory breach and misconduct under the SEBI IA Regulations.
Glossary: SEBI's New Rule - AUA Fee on Distributed Assets
AUA (Assets Under Advice):
The total value of financial assets for which an Investment Adviser provides advice and is permitted to charge advisory fees. It represents the portfolio that falls under the adviser’s fiduciary responsibility and forms the basis for fee calculation under the AUA model.
Second Opinion:
A form of advisory service where an IA reviews, evaluates, or provides guidance on investment products that the client originally purchased through another distributor or adviser. It allows clients to receive an unbiased professional assessment without altering their existing distribution arrangement.
Distributor Consideration:
A SEBI-recognized supervisory body responsible for the administration, monitoring, and oversight of Investment Advisers. It plays a key role in ensuring compliance, maintaining professional standards, and supporting investor protection across the advisory ecosystem.
IAASB (Investment Adviser Administration and Supervisory Body):
The Investment Adviser Administration and Supervisory Body (IAASB) is an entity recognized by the Securities and Exchange Board of India (SEBI). Currently assigned to BSE Limited, this body oversees the regulation and governance of registered Investment Advisers (IAs). Its mandate covers issuing operational guidelines, conducting compliance audits, managing client grievances, and monitoring IA activities through both on-site and remote supervision. IAASB also submits periodic performance and compliance reports to SEBI to ensure transparency and accountability within the advisory ecosystem.
Master Circular:
A comprehensive, consolidated rulebook issued by SEBI that brings together all applicable regulations, guidelines, and clarifications for Investment Advisers. It simplifies compliance by combining earlier circulars into a single, updated reference document that IAs must follow.
AUA-based fee:
AUA-based fee is a compensation model where an Investment Adviser charges a percentage fee based on the client’s Assets Under Advice (AUA)—the portfolio value actively advised by the IA. This fee structure aligns the adviser’s income with the size of the client’s advised assets and is regulated by SEBI to ensure transparency and prevent overcharging.
Official Resources & Downloads
- SEBI Circular PDF: https://www.sebi.gov.in/legal/circulars/oct-2025/ease-of-doing-business-measures-enabling-investment-advisers-ias-to-provide-second-opinion-to-clients-on-assets-under-pre-existing-distribution-arrangement_97555.html
- Master Circular for Investment Advisers
- IAASB Resource
- Learn@GurukulOnRoad
- NISM-Series-X-A: Investment Adviser (Level 1) Online Mock Test
- NISM-Series-X-B: Investment Adviser (Level 2) Online Mock Test
- Gurukul On Roadd All NISM Mock Test Series, Online Practice & Study Guide: CLICK HERE
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