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Financial Regulation: Even Eagles Need a Push

Suresh Sadagopan CFP IndiaBy Suresh Sadagopan, CFP

“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 regulators looking askance, at all financial service players.

Even though financial planners weren’t involved and didn’t contribute to the mayhem, they inevitably became affected. Slowly, 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. This change had major implications. India was the first country to experience this new rule and the regulators had meant for it to be an investor-friendly move. The actual effect was that 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 timing was also detrimental because equity markets were already going nowhere before the new legislation. But this was the collateral damage of what had started in 2008.

There are also new regulations for Mutual Funds, Capital Markets, and financial advisors.  Financial regulation is happening across the world and it appears that the financial services space is going to be one of the most regulated industries. What is even worse is that financial service intermediaries are being viewed with suspicion. Again, this is due to what happened internationally.

There is a lot of uncertainty today and the global recession is causing lots of problems in our societies such as unemployment, income stagnation, depreciating currencies, inflation etc. We have been experiencing these problems for the past 4-5 years. It’s time to accept the current issues and learn how to 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.

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 eventually spread across the world. This would be a big challenge for most advisors if it actually passed. For example, in the US, I understand, there are about 2,000 financial planners who are purely fee-based which leaves about 65,000 who would be effected by the proposed legislation. If the fee-only model is going to be made mandatory, it will have serious consequences on the financial planning profession.

Consequences of Investment Advisor Regulation

Most financial planners start as insurance agents, mutual fund distributors or other financial service intermediaries, then they qualify themselves with appropriate certifications, such as the CFPmark, and start offering professional advisory services. The advisory services are not paying their bills, though. Most clients believe that financial advice should be free, because traditionally, they have been offered advice for free from product sellers. Product sellers don’t charge for their advice because they are expecting a commission from selling products and because they are not qualified to give professional advice, they are not confident enough to ask for a fee. Therefore, their success is limited and their incomes are modest.

Some advisors have been more successful than others with charging fees. They have seen their fee-income competing with their commission-income, but this is still a rarity. Even rarer is a financial planner, who makes a good living by only charging fees.

In this milieu, the regulator has set the cat among the pigeons. Very few independent advisors can actually survive this new 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 is 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. This regulation will have a disproportionately devastating effect on independent 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 independent advisors. 2012 will be marked as a turning point in India’s financial planning history. This change, though a bitter pill now, will professionalize the industry. While I agree that segregating sales and advice is good for the long-term, I think, for best results, this should be implemented in phases and advisors should be given breathing room to make the transition.

The Road Ahead

Customer acceptance of financial planning is slowly growing. In the 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 and this requires patience. In-spite of the challenges, we all need to soldier along. The patient planners in the financial planning community will reap the rewards.

The trend of stringent regulations can be seen in other countries as well, such as Singapore, Australia & the UK. All financial services professionals will have to go through the wringer, one way or the other, at some point in time.

The other major trend I’ve noticed 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.

In that sense, when regulations push us into becoming full-fledged fee-only advisors, it is for the better. 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. In this regulatory change is the well-being of our clients… and our own well-being.

4 comments to Financial Regulation: Even Eagles Need a Push

  • Ankita Awasthi

    Hi ,
    This was a very informative article as it represented the true scenario of the financial planning career in India. I think the regualation is needed to separate the 2 because an insurance seller or MF seller cannot claim to be a finanacial planner!!! It becomes a very misguiding title! Doing real financial planning requires a lot of digging into the finances and expenditure patterns and then advising the client. Unfortunately “financial planning” is so loosely talked about in India. and the real credibility is lost of aperson who goes thorugh the course and gets a CFP certification.

  • I belive in fee plus commission base structure rather than fee only. Simply because we can reach out to more people. Fee base FP can be introduced provided some changes in the product approach like in Australia. In Australia even a mutual fund investment needs to be followed by an investment planning. Then it will make sense. If not we can only serve the nitch market.

  • Very true scenario described in the article!

    I feel that it is very natural thing that is happening. The adviser community in general is feeling hard to believe what is happening because of a fairly long period of the present distribution system which generally neglected clients’ true interest.

    In the long run the basics only survive, and financial planning can be best distinguished service only with its basics. For those very few people who really want to take financial planning to be a truly accepted profession, the regulation is the best thing happening.

  • Uttam Kumar Sen

    Change is inevitable, known from unknown. We need to work in our favor as it’s in our client’s favor.

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