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Regulatory Changes in India Affecting Financial Planners

Suresh Sadagopan CFP IndiaBy Suresh Sadagopan, CFP

“Times, they are a’ changing”, goes a song from times gone by. For the financial services industry, the changes have started coming in, fast and thick, since 2008.

The entire financial community was viewed with suspicion, with bankers bearing the brunt, for obvious reasons. Investor protection became the mantra and regulators started acting, on what they thought was best for investors. The current set of regulations in various parts of the world are trying to check mis-selling, bring in a suitability criteria for products advised to investors, ensure that proper risk assessment  is done before suggesting products, etc. In some parts of the world, they are trying to bring down the product commissions or even completely do away with them, to ensure that advisors do not have a vested interest in pushing products.

Changes in Indian Financial Regulation

In India, they are trying to regulate Investment Advisors, who now can only offer advice and charge their clients fees. This rule applies to individuals only. Companies can do both distribution and advice, if they set up separately identifiable departments. Now, this means that for people working in the corporate world, nothing changes, whereas for individual advisors, they need to decide whether they want to only offer advice and charge for it or if they would prefer to continue distributing products.

The upside of this is that the regulation is seeking to impose the fee-only model on everyone. Though the intention is good, it is bound to strait-jacket the advisors into one model. It may not work well in the current milieu as the fee paying culture is not yet developed. The fee-only advisors will now need to charge more as they have no other income stream to bank on, further acting as a deterrent to potential clients. It will be interesting times moving forward and we need to wait and see what strategies advisors will adopt to surmount the problem.

Many may simply set themselves up as a corporate entity, so they can do both advisory and distribution, but this would not change anything for clients. The industry is probably going to divide between advisors who register as corporate entities so they can do both advice and distribution and advisors who only do advice. This regulation also imposes far more responsibility on the advisor, including specific record keeping requirements and compliance audit. However, this regulation is not expected to be ground breaking, as it is allowing corporations to continue doing both advisory and distribution.

Will Commissions Be Completely Eliminated?

What is expected to happen in the years ahead may change the ground rules forever. It is expected that the commissions on all products will go away. If that were to happen, all advisors irrespective of what they call themselves will have to charge a fee for advice and management of assets. This could truly remove any vested interest in advisory. However, the environment could get tougher as everything is going to be fee based. Collecting a separate fee has always been a challenge, as opposed to an embedded fee in the product. The overall income of operators is expected to come down, though the costs would be higher due to much higher reporting and compliance requirements.

Also, the regulations have not addressed the problem of intermediaries calling themselves by fancy names. Financial Consultants, Financial Architects, Wealth Planners, Money Counselors etc. are some of the fancy designations that they give themselves. This is going to result in confusion in the minds of the public as they have no way of knowing, what each of these means. Regulators should address this immediately. The regulators concerned should mandate that the designation should truly reflect what they do and not bring creativity into it. It should be made compulsory to use designations like Stock Broker, Insurance Advisor, MF distributor, Financial Planner etc., based on what an individual is registered for.

Financial Planners and Doctors Should Be Treated the Same

The regulators don’t tire of the medical analogy. In that profession, a patient must consult a doctor, who prescribes medicines which are to be sourced from the pharmacist. In the financial services space, this kind of tight coupling is not there. So, an investor can directly buy a product from the manufacturer or  they can buy through a distributor, without first seeking advice. The manufacturer/distributor does not know the client situation well enough and this could result in wrong products being sold. This is a serious problem not being addressed in the financial services industry.

If consulting a fee-only “Investment Advisor” were made mandatory, we would see the development of a class of advisors, who act exactly like doctors. They would charge a fee per consultation and dispense advice which can be sourced elsewhere. This would make advice accessible to all, just like doctors are accessible to the general public.

If regulators are really serious about investors getting correct advice, they have to mandate that clients consult an “Investment Advisor”, who has complied with all regulatory requirements, and buy products elsewhere. Only then will the financial advisory field gain the legitimacy that it needs and as a result, help in establishing a framework where investors have to source advice before taking action. This will immensely benefit both the public and the profession.

Regulators all over the world want to do well for the public, but they also seem to be confused a lot. They are introducing regulations that are good in parts. Such half-baked regulations are going to create confusion and distortions that will be apparent later. Hopefully, regulators will notice these distortions and take corrective action overtime. Until then, confusion will reign. The investor for whom all these things are happening for is just as confused as the rest of us, in this rapidly evolving environment.

The best thing to do in this situation is to keep engaged with clients and keep them informed about what is happening and the impact it has on us and them. After all, investors need us as much as we need them. When the channels of communication are open and we are willing to honestly and truthfully update clients on what is happening in our field, we will be able to sail through these troubled waters successfully.

1 comment to Regulatory Changes in India Affecting Financial Planners

  • Sangram Patil

    A very nice article. Thanks for throwing some light on the forthcoming changes in the Indian Financial Regulations.
    However even if it is made mandatory to consult a “Fee Only” Investment Advisor”, before being able to buy an Investment Product from a Manufacturer / Distributor, the Manufacturers / Distributors would start influencing the “Fee Only” Investment Advisor, the way today’s Pharma companies try to do it with the Doctors.

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