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India’s Financial Planning Needs Regulation Changes

By Dr. (Col) KK Goel, CFP

Financial planning is the process of developing strategies to assist clients in managing their financial affairs to meet life goals. It was first conceptualized in the early 1970s in a Chicago, USA airport by a group of insurance industry professionals. In India, this concept came into being in 2002-03. FPSB India has done a great job in spreading the financial planning profession, and acting as a professional standards setting body.

The majority of us have been putting our money in financial products, on the advice of insurance /mutual fund agents, without understanding our requirements: would this product help in fulfilling our financial requirements/goals? What are the risks involved, would I be able to get back the money when required, how are the taxation and inflation going to impact the returns of this product?

A CERTIFIED FINANCIAL PLANNER professional helps in understanding these questions. CFP certification is a mark of excellence, given to an individual who has gone through the stringent standards of education in risk management, investment, retirement planning, taxation and estate planning, and to correlate this knowledge to give client-oriented, competent, sincere, and ethical advice to help clients take prudent financial decisions. Not only must a CFP professional meet stringent education requirements; he has to clear the examinations, has to have at least one year of supervised, or three years of unsupervised experience, and follow the code of ethics laid down by FPSB India before this certification can be awarded. Thereafter, there is the yearly requirement of continuing professional development to ensure his knowledge is updated.

Need of reforms. present status:  Where do we get our financial advice today? Mutual fund agent, Insurance agent, stock broker, tips from media, etc. How many investors understand the product, its pros and cons, its risks or whether the product will fulfill their requirement? Do they understand the competency of the advice giver?

With globalization, events in one country affecting others and turmoil in the financial markets, the confidence of investors is shaken.

Complexity Drives Need for Reform

Over time, with financial products becoming very complicated and with poor financial awareness amongst the public in general, it is becoming more and more difficult for an individual to make a prudent financial decision. Most do not know what their financial goals are, or what they want out of their savings.

Rules and regulations are very old and with too many amendments. Taxation rules, in particular, have become very complicated and need to be made simpler and more pragmatic.

The first step we need to take is to spread financial education and awareness in public. This should start right from school level. We all teach our children to work hard, get good grades in exams, and get good jobs. Do we ever teach them how best to invest the savings, what different financial instruments are available to invest in, and what the pros and cons are of these instruments? Most of us tend to keep our money in saving banks and lose on inflation and taxation. For financial awareness and education, action needs to be taken at all levels —  government, regulators, financial product manufacturers, financial product providers, education providers, financial advisors, and parents.

Financial Planner vs. Product Seller

We need to differentiate between a financial product seller and a financial planner/ financial advisor. The public needs to be educated on benefits of fee-based, unbiased, client-oriented advice versus simple product pushing and the old system of “pay backs.” This will go a long way in helping consumers achieve good financial health, and helping us build a financial planning profession. This would in turn help to improve overall economy of the country, as well.

The trust of investors is at its lowest. Inflation is very high. The growth rate is falling. Overall, there is gloom in the markets. Under such circumstances, reforms in the financial sector take a priority. We need to improve the trust of the consumers.

A financial planner advises his clients on various aspects of personal financial matters, including investments in equity, debt instruments, risk management, retirement planning, taxation and estate planning, and thus, he comes under multiple regulators. To ensure better regulation and in the interest of consumers, it becomes a necessity to create a self-regulating organization.

Rules and regulations in financial sector have become pretty old with too many amendments. This has created lot of difficulties. New regulations and rules need to be created through financial sector reforms, to make them simple effective and better understood by public. These new reforms must specifically look into the public interest, safety and an efficient redress mechanism.

Another important aspect is real estate, which I feel is the most unorganized sector at present. Most of the black money is flowing in this sector. A lot needs to be done to bring in reforms, to organize the sector and ensure complete transparency in all the deals in real sector.

Investment products are intangible and pay offs are in the distant future. Moreover, financial products are becoming very complicated and beyond the understanding of an average investor; as such, financial awareness and education are very low in India. It is felt we should seriously consider the necessity of advice of a Financial Planner and/or Investment Advisor, certified by a regulatory authority, a must for procuring these financial products. It would be like getting a prescription from a doctor before being able to buy a medicine. This would help in protecting investors.

6 comments to India’s Financial Planning Needs Regulation Changes

  • Abhinav Gulechha

    Hi

    Thank you for this post. I particularly agree with the idea that financial planning need to be taught right at school and college level. The biggest problem is not in convincing clients about benenfits of financial planning, it is in making them aware that it does exist.

    Nice post!

  • Surendra

    There are quite some CFPs marketing Insurance Products as Wealth Builders. Its as though this degree has given an additional ammunition to fool investor at large.

  • CDR. D V CHETAL

    I fully agree that there is need to ensure that the FINANCIAL CONSULTANTS are fully trained & informed about the prevalent situations so that they can look after their clients adequately.

  • ASChilana

    very informative article easy to understand

  • AV RAMANA MURTHY

    Yes as long as the regulations allows the company to advertise the products to sell in the market the system of selling the products by the agents/advisors will not be stopped…the awareness of Financial Planning is needed for a better future by all means, who can bell the cat.

  • kvmohan

    The known fact is Insurance industry is well estabilished and promoting products actively.The sizzle sale of winning clients with fear strategy and selling excitement with good commission package eventually do not attract tedious planning activity for client.Many of us became as an insurance agent for survival and to achieve certain financial goals.
    Only with passion for helping others will eventually make this financial planning industry relevant.

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