Role of regulators in wealth management

R.RADHAKRISHNAN | Updated on September 10, 2011

Mr R.Radhakrishnan


Any regulation or guideline in wealth advisory business has to encompass different kinds of players that exist in the market.

The capital market regulator, Securities and Exchange Board of India (SEBI), has proposed a Self Regulatory Organisation (SRO) for the wealth management industry to regulate the business. According to SEBI, the new SRO would also serve as a medium for SEBI to implement its various initiatives for the wealth managers.

Any regulation or guideline in wealth advisory business has to encompass different kinds of players that exist in the market. There are a range of service providers in the wealth management spectrum and the services they offer range from a pure advice to a level of comprehensive portfolio management services.

Wealth advisory business

In the Graph, X axis represents the transaction authority of wealth mangers, which increases as we move towards the right of the axis. A pure financial planner does not have any transaction authority as his role ends with providing advice, and there is a total responsibility of the money management on the Portfolio Management Services (PMS) provider. On the Y axis, we have the fiduciary responsibility of the wealth managers which increases from a low to high for a PMS.

In a country such as India, there is a necessity for the existence of each of these players in the wealth advisory business. Any regulation governing the wealth advisory business has to be evolved taking into account the role, contributions and responsibilities of each of these segments in the creation of wealth for investors.

When it comes to regulating, the simple financial planning advisor, as he is not executing any investment contracts, the loss to the customer is the investment he makes, based on the advice. It is important that such quality advice, which will have far-reaching implications on the life of a customer, has to be given by a properly trained professional and, hence, a regulation specifying the minimum educational qualification or certification requirement to offer financial planning service to an individual investor, has to be specified. In addition, an appropriate code of conduct to be evolved with the treatment for breaches and continued professional development mandates.

Attracting talent

In the case of a product distributor, there are multiple regulators governing the distribution and execution of the contracts such as licence for selling insurance product from IRDA, AMFI MF certification, NSE certification for capital markets, and so on. A product distributor selling a gamut of these products needs to get multiple certifications from different authorities. If this process can be simplified by bringing all these certifications/licences, it can help attract talent to the wealth investment industry.

We need a strong public campaign from the regulators on the need for availing of these services from the certified distributors only. In our country with a large investing population spread across the geography, these distributors play a key role in reaching to the customers. Any wrong sale by a group of them will affect a large section of the investing community, which necessitates a stricter regulation on the kind of products hawked by these distributors.

When it comes to further regulating the investment managers and PMS, in addition to the existing regulations, a lot more care needs to be taken, as the product and execution complexity increases substantially, and this is where quite a few errors or duping of the customers happen. The regulation to cover aspects such as use of power of attorney (POA), recommendation of products based on risk profile, product nature, justification for recommendation, and method of obtaining consent from customers, timing of execution, and avoidance of contra position.

Investor protection

In India, we have large corporate, banks offering investment management and PMS services through their employees. The employees are normally remunerated and rewarded on the basis of fee income earned by the individual staff and, in such cases, there is a natural tendency on the part of these staff to sell products that get higher income to them, which may not be in the best interest of the customer. A standard documentation encompassing risk evaluation, asset allocation, investment justification, remuneration to the advisor and the concurrence of the investor for the investment is recommended.

In addition to the above categories, we witness the emergence of Internet, telemarketing as a means of financial products distribution in a big way, and the guidelines or self-regulation proposed need to specify the rules governing these business approaches also.

The Indian financial market, with the high propensity to save by our people, is poised for rapid growth and change in the way we operate.

The regulators are keen on investor protection by setting up appropriate SROs, regulations and increasingly fixing the responsibility on the financial product distributors, which means that we are in for a lot more document-intensive investment actions.

(The author is Project Consultant, Fin Plan Solutions, Chennai.)

Published on September 10, 2011

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