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Alerts & Updates 20th Nov 2025

SEBI permits Investment Advisers to charge AUA-based fees for a second opinion

Authors

Vinod JosephPartner | Mumbai
Zaynali BadamiAssociate | GIFT City

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  • Introduction
    SEBI has issued a circular dated October 30, 2025 (Amendment Circular) addressed to all Registered Investment Advisers, modifying Clause 1(iii)(f) of the Master Circular for Investment Advisers dated June 27, 2025 (IA Master Circular).
    Clause 1(iii) of the IA Master Circular regulates the charging of fees by Investment Advisers (IA) and provides that IAs can charge fees under two modes, namely, (i) Assets under Advice (AUA) mode, which is subject to a limit of 2.5% of AUA per annum per family of client across all services offered by IA, and (ii) Fixed fee mode, which is subject to a specified fee limit of ₹1,51,000 per annum per family of client across all services offered by IA. IAs are allowed to change the fee mode for a client at any time, but the maximum fee that can be charged by an IA cannot exceed the fee limit under the fixed fee mode or 2.5% of AUA per annum per family of client, whichever is higher.

    Prior to the Amendment Circular, sub-clause (f) of Clause 1(iii) of the IA Master Circular stated as follows:
    “Any portion of AUA held by the client under any pre-existing distribution arrangement with any entity shall be deducted from AUA for the purpose of charging fee by the IA.”
    The abovementioned language of Clause 1(iii)(f) of the IA Master Circular led to a problem whereby if a client wanted a second opinion from an IA on assets advised by a different IA, the IA giving the second opinion could not charge a fee based on the value of the assets for which the opinion was being sought.
    The Amendment Circular now permits IAs to charge AUA-based fees on assets under pre-existing distribution arrangements, but only when the client is seeking a second opinion. The fee is capped at 2.5% per annum of the value of such assets.

    The Amendment Circular replaces sub-clause (f) of Clause 1(iii) of the IA Master Circular with the following language:
    “For clients seeking second opinion on assets under pre-existing distribution arrangement with other entity, IAs may charge fee on the assets under pre-existing distribution arrangement under AUA mode, subject to a limit of 2.5% of such assets value per annum. IAs shall, on annual basis, disclose and seek consent from such clients that apart from the advisory fees payable to the IA, the clients will be incurring costs towards distributor consideration for such assets.”
    The Amendment Circular took effect immediately upon issuance on October 30, 2025.

    ELP Comments
    • IAs registered with SEBI under the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (SEBI IA Regs) are restricted from providing other services.
      • ­Regulation 22 of the SEBI IA Regs provides that an individual IA shall not provide distribution services. The family of an individual IA shall also not provide distribution services to the client advised by the individual IA and no individual IA shall provide advice to a client who is receiving distribution services from other family members. A non-individual IA can provide both investment advisory and distribution services, subject to the following conditions:
        • The IA shall have client level segregation at group level for investment advisory and distribution services.
        • The same client cannot be offered both advisory and distribution services within the group of the non-individual entity.
        • A client can either be an advisory client where no distributor consideration is
          received at the group level or distribution services client where no advisory fee is collected from the client at the group level.
      • Any investment adviser can also be registered as a research analyst with SEBI under the Securities and Exchange Board of India (Research Analysts) Regulations, 2014 (SEBI RA Regs). The entity which is registered as an IA and a research analyst has to provide an undertaking stating that it shall maintain an arm’s length relationship between these two activities, which should be clearly segregated from each other.
    • The reference to “pre-existing distribution arrangement” in Clause 1(iii)(f) of the IA Master
      Circular and the change brought about by the Amendment Circular in the aforementioned Clause 1(iii)(f) should be understood in the context of the restrictions on IAs from providing distribution services.

      • ­Let’s consider an example to understand the aforementioned (old) rule better. A family (C) has assets worth Rs. 250 crore and invests Rs. 50 crore in an alternative investment
        fund (AIF-Delta) using the services of “X”, which acted as a distributor. C pays “X” 2.5% per annum of the amount it invested in AIF-Delta as per the AUA model.
        Subsequently, “C” retains “Y” to provide investment advice for all its assets (which are worth Rs. 250 crore). “C” and “Y” agree on the AUA model for payment of fees. Since “C” has paid “X” for distributing a portion of its assets, “C” cannot pay “Y” more than 2.5% of Rs. 200 crore per annum or ₹1,51,000 per annum, whichever is higher, even if “Y” is advising on all of “C’s” assets worth Rs. 250 crore.
      • Post the effective date of the Amendment Circular, using the example mentioned above and modifying the facts, if instead of retaining “Y” to provide investment advice for all its assets, “C” hires “Y” to provide a second opinion on the service provided by “X” (leading to the investment of Rs. 50 crore in AIF-Delta), “C” would be able to pay “Y” 2.5% per annum of the amount it invested in AIF-Delta as per the AUA model. “Y” shall, on annual basis, disclose and seek consent from “C” that apart from the advisory fees payable to “Y”, C will incur costs for the distribution services rendered by “X” for such assets.
    • SEBI has always gone out of its way to protect investors from being exploited by distributors. Accordingly, Clause 1(iii)(f) of the IA Master Circular applies only in respect of fees paid in respect of “distribution arrangements.” If an investor who has received non-binding investment advice relating to his investments from an IA registered with SEBI under the SEBI IA Regs, wants to hire another IA to give a second opinion on the same assets, Clause 1(iii)(f) of the IA Master Circular does not restrict the second IA from charging fees under the AUA model for all the assets on which the second opinion is being provided.

    The Amendment Circular can be accessed here.
    The IA Master Circular can be accessed here.

    We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com or write to our authors:

    Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

    Zaynali Badami, Associate- Email- zaynalibadami@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein

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