Many issues for intermediaries

The Indian financial sector is on an over-drive on the policy front in recent times. India is probably the only country to contemplate so many regulatory changes in such a short span. In a bid to make financial markets more transparent, the Securities and Exchange Board of India (SEBI) recently came out with a concept paper on regulation of investment advisors. Let us dwell briefly on some of its grey areas before this becomes as an act.

Qualification Vs experience

The concept papers lays down that an individual should either possess a professional qualification such as CA, MBA and so on or have 10 years experience to become investment advisor. This “either/or” approach appears flawed as both qualifications and experience may need to come together for a successful financial advisor.

The paper does not prescribe any experience for those possessing a professional degree, which appears inappropriate.

A fresh Chartered Accountant is after all specialised in accounting, auditing and taxation and does not necessarily have knowledge of the various investment avenues. An investment advisor should be one who has fair understanding of all asset classes and this is typically cultivated through experience. The regulators could have stipulated that those with professional degrees should also have a few years of experience.

On the other hand, stipulating that those with 10 years of experience can become investment advisors irrespective of their qualifications could also be problematic.

It is hard to perceive how those selling mutual funds or small saving schemes for 10 years on a part-time basis can be expected to handle asset allocation and advise on the financial needs of the customers.

Asking clients to fill in a questionnaire on their risk appetite and goals, and building a financial plan on the basis of this are inherent to good financial intermediation. .

Fee-based model

Then there is the distinction between agents and advisors. Expecting that intermediaries should earn their livelihood only from a pure fee-based advisory model too appears impractical. In such a case, many may stick to the tag of agents just to earn commissions, rather than become advisors.

If we look at the Ameriprise Financial, the largest employer of certified financial planners in the United States, its revenue earned from insurance, annuities and mutual fund commissions is much higher than what it earns from the financial planning - a pure fee-based activity. Even in India, the situation is not different and companies such as Bajaj Capital earn higher revenue from commission rather than from fees on pure advisory services.

Need to upgrade

So, what is the way out for the current independent financial advisors if the concept paper is implemented? They may need to upgrade their skills.

At the ground level, manufacturers, to tide over a particular situation, offer products suitable for the prevailing market such as capital protection funds launched by mutual fund companies. Similarly insurance companies turn back to endowment plans when the equity markets are down.

Advisors need to possess the capability to understand the changing dynamics of the market and the products that manufacturers are offering.

The industry should also be allowed some time to switch over. If things are rushed through as it was done with the removal of entry load on MF, the industry will suffer and the regulators could be forced to retract at a later date. If commissions on the financial products too can be brought down gradually, then IFAs will adapt to the situation to move to fee-based environment.

Regulation

A final question about the regulation is how it proposes to deal with non-capital market advisors. SEBI may be empowered to regulate mutual fund or stock market advisors, but how about those advising on fixed deposits, real estate or gold?

To resolve such issues, it may be worthwhile to create a body with members from each of the regulatory bodies. This body can ensure that interest of investors is protected even as the relevance of the financial advisory community is not impaired.

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