NISM-Series-X-A: Investment Adviser (Level 1) · Key Regulations

Fees, Segregation and Conflict of Interest Rules for Investment Advisers

Updated 11 October 2026 · Fact-checked

Under the SEBI (Investment Advisers) Regulations, 2013, an adviser charges fees only to the client, in AUA mode (up to 2.5% a year) or fixed mode (up to a rupee cap), through traceable channels. Advisory and distribution must be kept apart, and conflicts must be avoided or disclosed. Solve questions by identifying which rule applies.

Understand Fees, Segregation and Conflict of Interest Rules

An investment adviser (IA) is paid by the client for advice. A distributor is paid by the product manufacturer, usually as commission, for selling products. This is the root of the whole topic. If an adviser also earns commission on what they recommend, their advice may be biased. SEBI's rules exist to remove that bias.

SEBI therefore controls three things. First, how much and how an adviser can charge. Second, segregation: advice and distribution must not be mixed for the same client. Third, conflict of interest: any situation where the adviser's gain could clash with the client's interest must be avoided, and if it cannot be avoided, disclosed.

For fees, the adviser chooses one of two modes per client. In the assets under advice (AUA) mode, the fee is a percentage of the assets the client has taken advice on, capped at 2.5% per annum per client across all services. In the fixed fee mode, the fee is a flat amount, capped at a rupee amount per annum per client across all services. SEBI revises this rupee cap from time to time, so use the figure in the current NISM workbook or SEBI circular. The caps are meant for individual and HUF clients. Non-individual clients and accredited investors are outside them.

Fees must be paid by banking channels or other modes that leave an audit trail. Cash is not allowed. For individual and HUF clients, an adviser cannot collect fees for more than two quarters in advance. Fees linked to performance or profit sharing are not permitted for clients other than accredited investors.

For segregation, an individual IA cannot provide distribution services to its advisory clients, and neither can the IA's family members. A non-individual IA must keep advisory and distribution at arm's length, with separately identifiable departments and client-level segregation, and must not give distribution services to the same advisory client. Clients cannot be forced into availing distribution or other services. When advising on mutual funds, the IA recommends direct plans only.

Key formulas to remember

AUA mode fee cap: Maximum fee = 2.5% × assets under advice, per client per annum; Covers all services of the adviser to that client. It is a ceiling, not a fixed rate.
Fixed fee mode cap: Maximum fee = a rupee cap per client per annum, set by SEBI and revised from time to time; Also covers all services. Use the figure in the current NISM workbook or SEBI circular.
Advance fee limit: Advance fee ≤ 2 quarters (6 months); Applies to fees collected in advance from the client.
Payment modes: Banking channels or other modes with an audit trail; no cash; Cheque, demand draft, bank transfer and similar traceable modes are acceptable.
Segregation rule: Distribution services must not be provided to the IA's own advisory clients; Individual IA: cannot provide distribution services to its advisory clients, and nor can the IA's family members. Non-individual IA: distribution arm kept separate at arm's length with client-level segregation, and no distribution services to the same advisory client.
Mutual fund recommendation: IA recommends direct plans only; Regular plans carry distributor commission, which would create a conflict.
Conflict rule: Avoid conflict; if unavoidable, disclose it to the client; Disclosure supports avoidance. It does not replace it where the rules ban the activity.

How to solve Fees, Segregation and Conflict of Interest Rules questions

Most questions test one precise rule or a trap that bends it slightly. Use this routine.

1Identify the type of question: fee limit, payment mode, advance fee, segregation, or conflict of interest.
2Check who the client is. Fee caps are meant for individual and HUF clients, not for non-individual clients or accredited investors.
3For a fee question, note the mode used (AUA or fixed) and apply only that cap to all services combined for the client.
4For a calculation, compute the percentage on the stated assets, then compare it with the permitted ceiling.
5For a segregation question, ask whether the same client is receiving both advice and distribution. If yes, it is not allowed.
6For a conflict question, ask whether it is avoided, managed, or disclosed. Pick the option that protects the client.
7Read each option for extreme words like 'always', 'only' or 'cash', and eliminate those that break a stated rule.
8With negative marking, answer only if you can name the rule that supports the option.

Quickest way: Rule-matching shortcut

When to use it: Use this for one-line theory MCQs on limits, modes and segregation when time is short.

Recall the five anchors: 2.5% AUA, the fixed fee rupee cap (take the current figure from your workbook or SEBI circular), two quarters advance, no cash, advice and distribution kept apart.
Match the question to one anchor.
Reject any option with a different percentage or advance period, a cash mode or a commission linked to advisory clients.
For calculations, take the lower of the calculated amount and the cap only when asked for the maximum permitted fee.

Common mistakes in Fees, Segregation and Conflict of Interest Rules

Treating 2.5% as the fee every adviser must charge
Students remember the number and drop the words 'maximum' and 'per annum'.
Fix: Read it as a ceiling per client per year, covering all services, not as a standard rate.
Adding the AUA cap and the fixed fee cap together
Both numbers appear in the same rule, so they seem cumulative.
Fix: The adviser picks one mode for the client. Only that mode's cap applies.
Thinking advance fees can be taken for a full year
Annual fees are common, so students assume annual prepayment is allowed.
Fix: Advance collection is limited to two quarters. Remember six months.
Believing disclosure of commission makes distribution to an advisory client acceptable
Students overgeneralise the 'disclose conflicts' rule.
Fix: Segregation is a ban on providing distribution services to the IA's own advisory client. Disclosure cannot cure it.
Confusing an investment adviser with a distributor
Both talk to clients about products.
Fix: Adviser is paid by the client and recommends direct plans. Distributor is paid by the manufacturer and sells regular plans.
Applying the fee caps to every client type
The cap is learned without its client conditions.
Fix: Remember the caps are meant for individual and HUF clients. Non-individual clients and accredited investors are outside them.

Worked examples

Example 1

An individual client takes advice on assets worth ₹60,00,000 under the AUA mode. What is the maximum annual fee the adviser can charge?

A. ₹1,20,000
B. ₹1,50,000
C. ₹1,00,000
D. ₹2,50,000

Show the solution

Identify the mode: AUA mode, so the cap is 2.5% per annum.
Compute 2.5% of ₹60,00,000 = 60,00,000 × 2.5 ÷ 100.
60,00,000 × 2.5 = 1,50,00,000, and dividing by 100 gives ₹1,50,000.
Check each distractor against ₹60,00,000. Option A (₹1,20,000) is 2% of the assets, so it is a lower rate and not the 2.5% maximum. Option C (₹1,00,000) is about 1.67% of the assets, a figure that does not come from the cap. Option D (₹2,50,000) is about 4.17% of the assets, which is above the cap. Only option B equals 2.5%.

Answer: B. ₹1,50,000

Example 2

An adviser with an affiliated distribution company proposes to sell regular-plan mutual funds to an existing advisory client and earn commission, saying the commission will be disclosed. Which statement is correct?

A. Allowed, because disclosure removes the conflict
B. Allowed, if the commission is below 2.5%
C. Not allowed, because distribution services cannot be provided to the adviser's own advisory client
D. Allowed, if the client pays the advisory fee in cash

Show the solution

Spot the issue: the same client would receive advice from the adviser and distribution services linked to it.
Recall the segregation rule: an IA cannot give distribution services to its own advisory client, and disclosure does not cure it.
Option B misuses the 2.5% fee cap, which relates to adviser fees, not commission.
Option D is wrong because cash fee payment is not permitted and it has no link to segregation.
The adviser should also recommend direct plans, not regular plans.

Answer: C. Not allowed, because distribution services cannot be provided to the adviser's own advisory client

Exam tips

Memorise 2.5% for AUA and two quarters in advance. For the fixed fee, use the rupee cap in the current NISM workbook or SEBI circular. Examiners build wrong options around nearby values.
Watch for the words 'maximum' and 'per annum'. In calculations, apply the cap to all services combined for the client.
Expect scenario questions where an adviser or family member sells products to an advisory client. The answer is usually segregation.
Remember direct plans for mutual fund advice. Any option recommending regular plans is usually a trap.
X-A has negative marking of 25% of the marks of a question. On a 2-mark caselet question, a wrong guess costs more, so eliminate options by rule before answering.

Practice questions from Key Regulations

Fees, Segregation and Conflict of Interest Rules: frequently asked questions

What is the investment adviser fee limit under SEBI rules?

There are two modes. In AUA mode, the fee is capped at 2.5% of assets under advice per client per annum. In fixed fee mode, it is capped at a rupee amount per client per annum, which SEBI revises from time to time. Either cap covers all services to that client, so use the fixed fee figure given in the current NISM workbook or SEBI circular.

What is the difference between an investment adviser and a distributor?

An investment adviser is paid a fee by the client and gives advice in the client's interest, recommending direct plans for mutual funds. A distributor sells products and is paid commission by the manufacturer. SEBI keeps the two activities segregated: an IA cannot provide distribution services to its own advisory clients, and the same applies to an individual IA's family members.

Can an investment adviser collect fees in advance?

Yes, but only up to two quarters in advance. Fees must be paid through banking channels or other modes that leave an audit trail. Cash is not allowed.

How are conflicts of interest handled by advisers?

The adviser must avoid conflicts where possible. Where a conflict cannot be avoided, it must be disclosed to the client. Disclosure does not make a banned activity, such as distribution to an advisory client, permissible.