Professional Investment Advice: Who Can Give It?

Taking investment advice from people who are unregulated or are not professionally qualified has its own pitfalls.

When you see the question in the headline, who can give professional advice, your instant reaction would be, a professional.

It sounds obvious. Such as, who can give medical advice: a doctor; who can handle high-voltage electricity lines: a professional electrician.

However, when it comes to investment advice, people tend to forget this basic truth. This is due to the apparent attractiveness of the proposition, the potentially superior returns from the investments in question. However, in the process, you are risking your hard-earned money.

As per SEBI regulation, ‘investment advice’ is an advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning.

Again, as per SEBI, the investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunication medium, which is widely available to the public, shall not be considered as investment advice for the purpose of Investment Advisor regulations. However, investment advisers who make public appearance or make recommendations or offer an opinion concerning securities or public offers through public media, are required to comply with the relevant provisions of SEBI (Research Analysts) Regulations.

What we derive from this SEBI definition is that when something is disseminated through formal media, there is a filtering and there is some level of accountability. However, when something is communicated through social media only, there is no accountability. Views may go wrong. Views of a seasoned, SEBI-registered investment professional also may go wrong.

Prescribed process

However, if the person is professionally qualified and has the requisite permission from the regulator, he/she has to follow the prescribed process and due diligence, and is subject to audit on the process followed. In social media, anybody and everybody can express views and give recommendations.

In today’s age of internet and free flow of information and opinions, we have the phenomenon of social media influencers.

Here, you have to distinguish between celebrities recommending a brand of cloth or cosmetics, and recommending investments.

Matter of choice

The distinction is, clothes or cosmetics is a matter of choice, and it is your choice to be influenced by a celebrity. You may argue that when you are investing your own money, it is your choice where to invest and whom to be influenced by. True. But think of it: when you are not well, do you take medicines recommended by a social media influencer or a doctor? That also is your choice.

Cases are surfacing, which are referred to as ‘pump and dump.’

A person or a group of people makes propaganda on the social media, the market price of the stock is jacked up, and they sell off at a profit.

If a SEBI-registered intermediary does this, there will be a SEBI audit and the licence is liable to be cancelled. However, when a non-SEBI-licensed person or entity does this, they are penalised, but as per civil laws. There is no licence to be cancelled. The question that arises here is, who is a SEBI-authorised person in this regard?

A person who is giving an opinion about a stock in public through a report, or opinion communicated through social media, has to be a research analyst. There is an exam called NISM Series XV which has to be cleared, and she/he has to register with SEBI as a research analyst.

For advising on portfolio construction, there are Investment Advisers (IAs). IAs have to pass the requisite exams and have commensurate background to get the licence.

Risk profiling

IAs have to do risk profiling of clients and document the basis or rationale of why they are recommending, what they are recommending. For investments through Mutual Funds and incidental advice, there are Mutual Fund Distributors (MFDs).

There is an exam called NISM Series VA which has to be cleared. MFDs also have to do client risk profiling.

To conclude, when you are being influenced by a film or other celebrity, it should rather be about the acting or other skills, than about investing your hard-earned money.


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