Financial planners seek 3 year transition period to become advisors

In response to the SEBI concept paper on regulation of distributors, here is the response from leading financial planners that has been collated and sent to SEBI by Mumbai based financial planners group Network FP

Points to be addressed while drafting the regulations for investment advisors:

1. Give a 3-5 year transition phase for all the current intermediaries before implementing the proposed regulations. Intermediaries need to continue earning their livelihood from current commissions before moving 100% to a pure fee-based advisory model.
2. Support the transition with financial literacy programs educating the consumers about hiring a good investment advisor, value of paying fee for advice, difference between a fiduciary role of advisor and an agency relationship of agent.
3. Make it mandatory for investors to get advice from “Investment Advisors” before buying of some financial products which are complicated to understand like in case of medical profession where most medicines are sold only on prescription by a qualified doctor.
4. Create a level playing field for Independents and Institutions. Allowing institutions to offer both advisory and execution by creating Chinese walls will put independent advisors at a disadvantage. Allow both or none.
5. Institutional players like banks resort to direct debit of fees to client’s bank accounts. Psychologically clients are more comfortable with this than writing a separate cheque. Make it mandatory for all players to collect fees by cheque /online payment gateways.
6. Prevent agents from styling themselves as advisors in reality after implementing the proposed regulations. There are chances of agents finding ways to offer and earn both commissions and advisory fees by creating complex ownership structures.
7. Include “CFP” i.e. “Certified Financial Planner” as one of the qualifications eligible for registering as an “Advisor”. CFP Certification is recognized worldwide as the highest level of qualification for financial planners and the education program is comprehensive.
8. Let the designations used by the advisor be flexible to accommodate titles like “Financial Planner”, “Financial Advisor”, “Financial Coach” etc and not be restricted to only “Investment Advisor”. Planners offer much more than just investment advisory.
9. Promote low cost investment products across all investment avenues so that end cost of both getting advice and buying products remains same or comes down for investors. An example would be introducing advisory class mutual funds with low expense ratio.
10. Ease the capital adequacy and infrastructure requirements for independent advisors. In financial advisory intellectual capital matters more than financial capital. Higher requirements may discourage young career aspirants opting for the profession.
11. “Investment Objective” & “Financial Goals” are as important as “Risk Profile” and should be documented and considered before giving any recommendations to client. This aspect should be considered in new regulations and included in compliance.
12. Define & Recognize Financial Planning Profession and Financial Planners. And lastly, there is a group of Financial Planners in India (most of whom are Certified Financial Planners), who are serious and passionate about the profession. A Financial Planner is a person who creates a written financial strategy for a client and advises a client in all areas of personal finance right from Cash Flows, Debt Management, Risk Management & Insurance, Investments & Asset Allocation, Creation of an Investment Policy, Co-ordination with a client’s CA, Tax Planning, Estate Planning and so on.

An ethical financial planner takes into account family’s goals, current financial situation (income, expenses, assets and liabilities, investments, insurance, family structure, time horizon, risk tolerance & capacity) and draws up a comprehensive financial plan to best address his goals, dreams and aspirations.

A Financial Plan is a comprehensive written financial strategy that is updated regularly to reflect changes in a family’s internal situation (income drop, birth of a child, relocation, death, divorce etc.) or external situation (tax law changes, stock market declines, interest rate volatility and so on).

A passionate financial planner will put anywhere between 30 and 90 hours of work on an individual client which includes Initial Meeting, Data Gathering, Analysis of the Data, Creation of a Financial Plan, Presentation of a Plan, Implementation of the Plan  and Regular Reviews. Therefore it is requested that the regulator takes cognizance of this fact and not to paint everyone in the same brush.

Address the danger of majority opting to remain “Agents”

It will be highly in the interest of all concerned parties, that the current IFAs are given a fair chance for transition by preparing themselves adequately for a pure advisory practice. The regulator is requested to address the danger of majority of the intermediaries choosing to remain “Agents” under the new regulations due to income levels dropping in the short term if they opt for being an “Advisor”. The threat will go against investors’ interest and the purpose of introducing new piece of regulation will be self-defeating.

The proposed regulations can bring in credibility to the advisory profession and consumers will benefit from the genuine and quality advice. However a proper time-frame of 3-5 years, enough groundwork/preparation, a level playing field and a practical implementation plan are of paramount importance for the success of the same.

Tell us what you think.