There is a saying in Tamil, which goes – To a potter, creating pots is several days work; but to a thug, it takes but a minute to destroy them all. Our Government has been acting like that thug, in many ways.
While it is unable to realistically create employment and even meaningfully enable business activity, it has been on the forefront of destroying sectors and industries.
In the Financial Services sector, Micro finance sector was targeted and now it is on it’s death throes. The Andhra government, in it’s infinite wisdom, banned collection door-to-door, banned weekly collections and made it mandatory for every application to be scrutinized by the government before a loan is disbursed! Banks have stopped lending to them. Collections have dwindled to 10% and bad loans have sky rocketed, due to meddling of local politicians. The provocation for all this – suicide by some borrowers, ostensibly due to coercion.
Mutual Fund industry has been limping from quarter to quarter, badly bruised after the entry load ban. The AUM as of September ’11,is at Rs.6.41 lakh Crores against a high of Rs.8.03 Lakh crores. This is happening inspite of the huge number of SIPs, month-on-month. The number of folios have been coming down, month-on-month. Why was this done? This was done so that churning is avoided and distributors who do not service their clients, do not walk away with the upfront brokerage, among others.
In these above two cases, there could have been better ways to ensure that particular problems are handled and all stakeholders are protected. Only those erring elements should have been pulled up through appropriate measures. Instead, they just threw the baby with the bathwater, making the industries themselves sick.
In Tirupur, they shut down dyeing units and threw lakhs of workers out of jobs. What these dyeing units were doing – polluting the environment – was despicable. But, could the government do only one thing – shut it all down? Can it not facilitate gradual progression to full compliance? Can it not facilitate setting up pollution control equipment? Is it responsible of our government to force shutdowns? Similarly, the latest is at Bellary… the entire region has fallen silent and the victims are, as always, the common man.
Punish the guilty. Don’t paint entire industries as villains. Those affected unintentionally are again the most vulnerable… in micro-finance, it is the poor dailywage earners who used to borrow money from MFIs, in MFs it is the orphaned retail investors, in Tirupur it is lakhs of workers, now out of job…
The latest Concept Paper for regulating Investment Advisors is again good only in concept, but would freeze the slow process of agents/ distributors converting themselves into advisors. Many IFAs are in the transition phase and most of their revenues currently, are from commissions. So, if they are given a choice between being an agent where there is a clear income stream and choosing to be an advisor, with the promise of fee-based income, the choice for most is very clear. Most will simply give up the Advisor dream up for good. Not only that– in case of an agent, there are no compliance requirements. In case of an advisor, there are lots of compliance requirements, which is at the same time onerous and costs money.
The Investment Advisor as defined in this concept paper is one who gives Financial Advice, offers Financial Planning Services or does something to influence an investment decision. Financial Planning Services are quite different from the other two. In Financial Planning one creates a blue-print to achieve one’s goals, through appropriate Financial Management. The other two services are hence small fragments of FP services. However, the definition of Investment Advisor is applied across the board, missing this basic point. The entire concept paper is geared towards a limited advice investment advisor and not a far more sophisticated, Financial Planner.
The concept paper itself recognizes the low level of Financial literacy in the country and yet tries to bring in a regulation that is to be introduced in some advanced countries like UK & Australia. There is no road map. It looks like they want to introduce this from 1 Nov., 2011. That is what they did in case of entry-load ban, with disastrous results.
Significantly, in US, all kinds of Financial Planners – Fee-only, Fee-offset, Fee & commission and commission only financial planners are present, side-by-side. Financial Advisors of all persuasions are also allowed to operate. The only thing that is required of them is that, they need to fully disclose what their models are and what they receive as commissions and incentives. Can we not use the same model? The US model is more suited here as most clients want the same person providing the advice to also implement & manage their assets, due to the trust they develop. If it is ensured that there is no compulsion for client to come to the advisor, what is the harm if the client chooses to do implementation with the advisor?
It is ultimately detrimental to the investors at large if most choose to be agents. Had SEBI just kept quiet, this process of transition would have fructified and would have created a number of capable advisors, overtime. Now SEBI is pulling that plug.
Also, including CAs and MBA and not including CFPs shows that they have not thought through what they want to achieve. CFP certification is an internationally recognized qualification for the Financial Planning profession. Not recognizing this and recognizing extraneous programs and courses by NISM, displays that for all to see, that they have not put proper thought into this at all.
Lastly, institutional investors are let off lightly where they just inform investors that they need not invest with them, make appropriate disclosures and maintain chinese walls??? This clearly shows that this piece of legislation is targeting individual advisors and nothing changes for institutions.
One can only hope that legislations which are not thought through properly and creates a uneven playing field in favour of institutions and will most certainly arrest the migration of agents to advisors, does not see the light of the day. It is a facile concept paper which needs a complete overhaul, if it has to work for all stakeholders.
Interesting read..made me think about the other side than that of investor. SEBI actions seem to be good in spirit as they want to protect the investor but are the investors mature enough to decide? But I think it might take some time and some pain but we would get a formula which suits everyone.
Other reason that think people are withdrawing their MF investments is because the market has become volatile and if Euro crisis is not solved the world financial crisis would be worse than 2008. And those who have burnt their hands or rather money by investing in peak of 2007-2008 would want to cut their losses..