It is an interconnected world. What is happening in the west has a bearing on the rest. That is very evident in our line – Financial Planning.
The meltdown in 2008 has resulted in the regulators looking askance, at all financial service players. Though Financial Planners were in no way involved or contributed to the mayhem, they were also going to be affected. Slowly, the regulator activism has spread across the world.
Regulator activism
In India, SEBI ( Securities and Exchange Board of India ) the Financial markets regulator, acted in August 2009 by removing the entry loads in all Mutual Fund schemes, was one that had major implications. This was to be an investor friendly move. This was not tried then anywhere in the world. But, it stunned the distributors and stunted the industry. There was no time for distributors to adjust to a completely new paradigm. There was huge churn and many distributors exited the industry. They left in their wake, a legion of orphan investors.
The time for the industry was none too good as the equity markets were going nowhere. But this was the collateral damage of what had started in 2008.
We are seeing more regulations… there are now new regulations for Mutual Funds, Capital Markets, Financial Advisors. Again, these are happening across the world. The new reality is that the financial services space is going to be one of the most regulated. We are almost in the over regulated territory. What’s worse, financial service intermediaries are being viewed with suspicion. Again, this is due to what happened internationally.
The times are challenging for the various economies around the world and due to that, it is causing lots of problems in the societies we live in. There is a lot of uncertainty today. Unemployment, income stagnation, depreciating currencies, inflation etc. are problems we have been living for the past 4-5 years. So, this is the new reality. We need to live with it and see how we can thrive and prosper.
Investment Advisor Regulation
The immediate challenge for Financial Planners in India is the Investment Advisor regulation that SEBI has brought in. Investment Advisor regulation covers anyone who offers investment advice for a consideration.
The regulation, in a nutshell, says that an Investment Advisor would receive no other remuneration in any form, apart from what they charge as fees for advice. This kind of regulation will now happen across the world. I understand that this is a big challenge the world over. Even in the US, I understand, there are about 2000 financial planners who are purely fee-based. If by regulatory fiat, fee-only model alone is going to be made mandatory, it will have consequences too.
Problems that Investment advisor regulation can spawn
What is happening today is that Insurance agents, Mutual fund distributors, other financial service intermediaries are qualifying themselves with appropriate certifications, mostly CFPCM, and have started offering professional advisory services. But this is not what is keeping their home fires burning, today. Most clients believe that financial advice should be free, as traditionally, they have been offered the same by product sellers, ofcourse with the intention to sell their products. Compounding that, since most have come from product selling backgrounds, they themselves are not confident in asking for a fee. Hence, their success is limited and their incomes modest from advisories. Bulk of their income even today, comes from commissions on product sales.
Some have been more successful than the others. Some have established their practices and have seen their fee income competing with their commission. But they are still a rare breed. Even rarer is a financial planner, who is living only by the fees.
In this milieu, the regulator has set the cat among the pigeons. Very few individual advisors, can actually survive this regulation. The ground is on fire now and most are fledglings and they can’t fly. They will not be able to continue to be financial planners or any kind of advisors. They will now go back to their distribution business as it a matter of survival. They cannot be expected to give up their main source of income, for financial planning, which at best is a promising profession, but without much track record in India. The rules set for corporate entities suggest that they can segregate their businesses and continue. Hence this regulation will have a disproportionately devastating effect on the individual advisors, while it may virtually be business as usual, for the corporate entities.
This period is going to be challenging to say the least, for individual advisors. This is again a turning point and historians will refer to this point in 2012, for good or for bad, which only time can tell. But, segregating sales and advice is good in the long-term. Hence, this change, though a bitter pill now, will professionalize the industry. However, for best results, this should be implemented in phases and breathing time given to the community to make the transition.
Road ahead
Customer acceptance of Financial Planning is slowly growing. In future, financial planning will be one of the most well accepted and respected professions. A lot needs to be done at the ground level to build awareness. This requires patience. In-spite of the challenges, we all need to soldier along. The patient among this community, will reap the rewards.
The trend of stringent regulations, are very much evident in other countries as well, like Singapore, Australia & UK. All financial services professionals will have to go through the wringer, one way or the other.
The other major trend seen is a slow but steady change in the consumer attitude towards accessing advice and paying for it. Personally, I have seen it improving in the past several years. That is a very nice development. In that sense, when regulations push us into becoming full-fledged fee-only advisors, it is for good. This is something which would be happening across the globe, at this point. We are probably seeing the ground being laid for years of prosperous growth.
Even eagles need a push, they say. If that regulatory push is what will help us to unfurl the wings, it is fine. Let us accept it, though it may be bitter now. And resolve to make it work. In that is the well-being of our clients… and our own well-being.