Archive / Investment Adviser (Level 1) / Investing in Stocks

nism-series-xa-sebi-ia-fee-modes-aum-vs-fixed-fee[ INVESTMENT ADVISER (LEVEL 1) ]

Under SEBI (Investment Advisers) Regulations, what are the statutory maximum fee caps an IA can charge to a retail client under the 'AUM-based Mode' versus the 'Fixed Fee Mode'?

[ A ]AUM Mode: Maximum 10.0% p.a.; Fixed Fee Mode: Maximum ₹50,00,000.

[ B ]IAs can charge unlimited fees without any regulatory ceiling.

[ C ]Fixed fee is capped at ₹10,000 per lifetime.

[ D ]AUM Mode: Maximum 2.50% p.a. of Assets under Advice (AUA); Fixed Fee Mode: Maximum ₹1,25,000 per family per annum across all services.[ CORRECT ]

Takeaway

Option D is correct: AUM Mode: Maximum 2.50% p.a. of Assets under Advice (AUA); Fixed Fee Mode: Maximum ₹1,25,000 per family per annum across all services.

Derivation

SEBI gives Investment Advisers two mutually exclusive fee structures to choose from for a retail client, each with its own statutory ceiling designed to prevent excessive or opaque charging. Under the AUM-based mode, the fee is capped at 2.50% per annum of the client's Assets under Advice. Under the Fixed Fee mode, the cap is ₹1,25,000 per family per annum, covering all advisory services rendered to that family unit collectively rather than per individual member. An IA cannot switch a client between these two modes more frequently than once every 12 months, which prevents cherry-picking whichever structure happens to generate a higher fee in a given period.

Why the others fail

A — AUM Mode: Maximum 10.0% p.a.; Fixed Fee Mode: Maximum ₹50,00,000.

10.0% p.a. and ₹50,00,000 both sit well above SEBI's actual statutory ceilings of 2.50% of AUA and ₹1,25,000 per family, which exist specifically to cap retail fees.

B — IAs can charge unlimited fees without any regulatory ceiling.

SEBI imposes explicit statutory ceilings on both AUM-based and Fixed Fee advisory charges precisely to prevent unlimited or extortionate fee arrangements.

C — Fixed fee is capped at ₹10,000 per lifetime.

₹10,000 per lifetime is far below the actual statutory Fixed Fee ceiling, which is set at ₹1,25,000 per family per annum, not a one-time lifetime figure.