Adaptation is an evolutionary process where an organism or species changes over time due to what it encounters in its environment. If it is a slow evolutionary process, it will not be noticed and the pain will be very less or not there at all. However, fast paced change can be unsettling. That is the reason why most people don’t like change. Change involves moving from one’s comfort zone to another, which is unfamiliar and hence unsettling. But change is inevitable and is like a tidal wave… it is for us to reconcile for ourselves that we cannot fight it but instead harness it for our betterment.
Many of you might have seen The Life of Pi. Pi’s life goes topsy-turvy literally, in the middle of the ocean, his ship sinks and he finds himself in a small lifeboat. He finds a Bengal tiger (Richard Parker) too in the boat and he is terrified. He builds a makeshift raft to escape the tiger. But he finds that he cannot abandon the boat. He has to feed the tiger and ensure that it does not eat him; he slowly learns & trains the tiger by using some techniques which keeps the animal, in its corner. They learn to live with each other. Over time they surmount several challenges along the way and after 227 days, their boat washes up on the coast of Mexico.
Pi’s situation was very difficult indeed. But, he learned to live with it… with a tiger to boot!
Now, we are experiencing change in our field. Many of us plunge into the abyss of sorrow and self-pity and are not willing to acknowledge the inevitability of change. Whether we like it or not, the Investor Adviser regulation is a reality. It is our Richard Parker! Now, how are we going to live with it? How are we going to benefit from it? Those are the questions that we need to answer.
The regulation is indeed a sea-change in the way we need to operate. In one fell swoop, we will all have to operate only on fees. The disconcerting fact is that there is not much time to adjust.
Instead of navel gazing, why don’t we dispassionately look at the regulation? Is the direction right? I would say so. It is inevitable as there seems to be a convergence of opinion across the world on this. Now, let us not start debating how unfair all this is, as all regulations are coming only in the financial services space. But, the 2008 problem emanated in this space and hence the regulations are also focused on this area – is it any surprise?
Will it benefit the clients?
Yes & no. This regulation sets a high bar and hence the Investment adviser (IA) should be someone who passionately believes in a consulting practice, is committed and willing to take a long-term view. Clients will be able to get good quality advice, if they are able to find investment advisers.
But the number of investment advisers is going to be miniscule for a long time to come, primarily due to the challenge of earning a viable income. Compliance, reporting & the attendant costs as well as the higher benchmarks for education/ experience, can also serve as a barrier.
What are the challenges for us?
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Cost of operations will go up, with registration compulsory for the investment adviser and their employees.
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Cost will also go up due to the kind of people one will not be required to recruit – PG degree/ diploma holders or graduate with five years of experience and with CFP or similar certification.
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Giving up the distribution income is not really a possibility for many, as this income is the main income source. Fee income is miniscule or non-existent for many of them.
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The advisory process/ reporting/ record keeping requirements are of a considerably higher order for investment advisers, which will entail significant investments in terms of time, resources, manpower and hence money. Costs are going to go up due to this too.
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The investment adviser has to be audited for compliance. Also, in case of a firm, a compliance officer would be required.
What are the problems that this regulation creates?
It excludes many from the purview of the regulation – like insurance agent, MF distributor, stock broker, CA, lawyer etc. Now, if protecting the clients is one of the important objectives, excluding so many from the purview of regulation and allowing them to offer incidental advice is not really meaningful. Investors will still get advice from various sources and may not be able to distinguish between an insurance agent, stock broker and an investment adviser.
Not many will register as investment adviser. Investors will have little choice as number of IAs will be very low.
This regulation does not expressly ask others to use designations that reflect their work, like stock broker, MF advisor, insurance advisor etc. Since, IA regulation is silent on this, anyone can call themselves anything – from financial architect, financial strategist, financial planner, money manager, wealth planner, financial coach etc. - all of which sound far more impressive as opposed to Investment Adviser and hence can sway the lay investor.
If a person is willing to register as aninvestment adviser, would they have to give up their trail commissions from insurance, mutual funds etc.? This is not clear and be a big problem for those who have built up significant income, over time.
Lack of clarity is another of the problems. What does arm’s length mean? Can a separate independent division be in the same office?
How to tide over the problems and become Investment advisers?
As it is, the regulation allows one to have Separately Identifiable Department in case of corporate entities. Similarly, separation of business will have to be done in individual cases and proper disclosures need to be made, when one deals with investors. It will be difficult but not impossible.
There could be big problems for Insurance Advisors, who may have to come under a corporate setup for ensuring their trail. Even then, problems would be there that need to be ironed out.
The other problem to be surmounted will be to inform clients about the regulation and the need to charge them for advice. This would be a long and arduous process, which may have to be done, one client at a time. But, it has to be done.
Why is it necessary to consider becoming an Investment Adviser?
It certainly is a difficult proposition to become an Investment Adviser. But, this is the direction in which the world is moving. The commissions to which most of us want to cling to, will disappear probably in the next three years, across products. It has already happened in UK & Netherlands now and is expected to happen in a whole host of countries this year. So, in future, we will anyway have to charge for services, much like a doctor or a lawyer.
If doctors, lawyers, architects etc. are able to live only by fees, is it too difficult for us to emulate that? I would only say that things are difficult for us, but once we get over these teething troubles, it will be much better for all of us. We will have to hunker down and survive this blizzard.
So, instead of being in denial, let us move forward and embrace change. This is just the beginning. It is like Pi finding himself with Richard Parker in the boat. We have a long journey ahead and storms to face and survive in future. Pi had remarked –“Richard Parker – it is because of you I’m alive. You keep me alert day and night and ensure that I lived all these days”. When there is no alternative (TINA), people do things which are otherwise unthinkable.
Let us reconcile ourselves with the regulation and learn to live with it – like Pi. His journey was so fantastic – the fantastic glow of neon algae in the middle of the ocean, dolphins jumping about, a blue whale surfacing or a carnivorous algae infested island – that the journey itself became the highlight. Reaching the shore, he did. We would also one day reach the shore and live to tell our tale of adventure. But, let us also enjoy the journey – it may actually be a fascinating journey of courage and conviction, which we would look back with pride.
This article was originally published by Network FP.
