We all know August 2009 front end sales commissions were banned by the regulator which hit the financial services distributions community like a Tsunami. No one was prepared. The impact was advisors shut shop, medium and large distributors came down heavily on costs, even asset management companies scaled down operations as volumes fell. An impact which did not leave any one without a scar.
Some two and a half years later we hear talks of the front end commission coming back. But today’s news states that the issue has been placed on the back burner. Looks like there is no immediate answer on the horizon. Indian regulators needs to do what is right for the consumer and to increase the penetration of Mutual Fund as an asset class. All stakeholders have to establish the long term nature of Mutual Fund investments. If one needs to churn then we have direct equities to play with.
However the best way forward is to look at delivering solutions and not products. Distributors, advisors and all intermediaries have to differentiate themselves on knowledge and advise. Hoping that product commissions will sustain us in the long term is not the business model one should strive to build. We have to move to equipping ourselves with Knowledge that creates the differentiation
On the certification / commission front India has to evolve its own model. What we can do at this time is look at some of the mature markets and see where they are and where they are headed. That will give us an indication but surely not the complete answer. Let’s look at the 3 most advanced markets USA, UK and Australia.
In the United States, the Financial Industry Regulatory Authority (FINRA) regulates and oversees the activities of more than 5,050 brokerage firms, approximately 172,050 branch offices and more than 663,050 registered securities representatives. A financial adviser or stock broker should be licensed to provide any consultation on investment in securities. Typical licenses needed to promote the sale of stocks are the: Series 7 (General Securities exam), Series 63 (State Securities exam), and Series 65 or 66 Uniform Investment Adviser Law Exam. Generally, any adviser who charges a fee for investment advice would need to also have the Series 65 or 66 license. Thus, anyone can call themselves a financial planner(although care must be taken not to be confused with a Certified Financial Planner), but they would still need FINRA licenses to provide advice for a fee or be registered as an investment adviser with the Securities and Exchange Commission in the USA. Anyone in the business of providing financial advice can call themselves a Financial Advisor. There currently isn’t any regulation on the use of this title. To charge a fee for advice, one must pass the FINRA Series 65 test—The Uniform Investment Adviser Law Examination. To be a “Registered Investment Adviser” (RIA) or “Investment Adviser Representative” (IAR), one must pass the FINRA Series 65 exam or both of the FINRA Series 7 and Series 66 exams.
In the United Kingdom investment advice is given either by a financial advisor or a stock broker.
Financial advisors need to pass an exam and receive a Certificate in Financial Planning (previously the Financial Planning Certificate) or the Certificate for Financial Advisers, and also authorised by the Financial Services Authority, that must be satisfied the advisor is a “fit and proper person” before they may practice.
Financial advisors are either
Tied – As the classifications suggest, tied advisors can only recommend ‘financial products’ marketed by the company they represent.
Multi-tied – Multi-tied agents perform a similar role, except they represent a number of different companies. This is sometimes referred to as the panel system. Tied and multi-tied advisors are nearly always rewarded via commission, though in some cases (and if the advisor is employed rather than self-employed) commission may be expressed in notional terms to justify a salary.
Independent Financial Advisor – must offer advice on all ‘financial products’ on the market (which carry commission) and, in addition, must offer clients the choice of paying a fee for advice about a product or products, rather than being remunerated commission from the financial institution that is promoting the product.
Fee-only – Fee-only financial adviser designs bespoke solutions, and often by investing directly removes marketing commissions and charges from the costs that clients would otherwise pay. Fee-only advisory firms tend to accept a professional duty of care.
In addition it is worthwhile to know about the Retail Distribution Review (RDR) program in United Kingdom. Envisaged in June 2006, the UK regulator (FAS) created its Retail Distribution Review (RDR) programme which they maintain will enhance consumer confidence in the retail investment market. The RDR has a target for full-implementation of 31 December 2012 but recent reports show that it might be delayed as it is expected to have a significant impact on the way in which financial services are delivered to retail investors in the UK. It is expected to significantly reduce the profitability of many IFA practices.
In anticipation of the new regulatory environment being enforced the industry landscape is undergoing significant change. The most significant identifiable trends are:
- Consolidators buying up small firms of IFAs as a result of the higher qualifications threshold and downward pressures on profitability resulting from RDR – E&Y estimate that the number of Registered Individuals will fall from 30,000 to 20,000 within the next 5 years
- IFAs are embracing the concept of wrap account – incumbent fund supermarkets and Life Asurance Companies are in response launching their own Wrap Platforms
- IFAs are rapidly moving from the traditional investment solution for clients: recommending a portfolio of largely equity-oriented collective investment schemes and being paid initial and annual renewal commission by the fund provider to an outsourcing model: recommending that clients appoint a discretionary fund manager to manage the client’s portfolio(s) and charging the client an annual oversight fee. A recent survey found that 89% of IFAs are considering outsourcing to discretionary managers as a result of RDR.
- Several new entrants are making major in-roads into this market at the expense of the incumbent retail-oriented funds groups. The larger discretionary fund managers are finding it difficult to adapt their business models to cope with these changes, given that the small average portfolio size is better suitedto multi-manager (portfolio of funds) solutions, via wrap platforms, when these fund managers tend to prefer to retain custody and investing in direct equities.
Australia issued some far reaching reforms in the Financial Advise space last year. The financial planning services were initially delineated by law by the granting of licence to deal in securities or advise on investments. Licences are issued under stringent criteria by the Australian Securities and Investments Commission (ASIC), broadly, most people embarking in financial planning will start as an authorised representative of a licence holder. Becoming a financial planner in Australia involves two main steps:
1. Meet the training requirements of Regulation Guideline 146;
2. Select a licence holder with whom to be affiliated.
The licence holder is the authorised representative, and will be ultimately responsible for the advice given by the planner. The licence holder therefore must make sure the representatives meet all compliance and training prerequisites.
FOFA reforms highlight
The exhaustive document covers various reforms, some local in nature and with details of process and next steps. We have highlighted the key reforms that could find its way into the Indian market in the future :
- A prospective ban on up-front and trailing commissions and like payments for both individual and group risk within superannuation from 1 July 2013.
- A prospective ban on any form of payment relating to volume or sales targets from any financial services business to dealer groups, authorised representatives or advisers, including volume rebates from platform providers to dealer groups.
- A prospective ban on soft dollar benefits (benefit is $300 or more from 1 July 2012). The ban does not apply to any benefit provided for the purposes of professional development and administrative IT services if set criteria are met.
Developments in India
The distribution community are now hearing of many developments in the Indian market as well. The formation of the Financial Stability and Development Council (FSDC) under the Honourable Finance Minister is one big development and which will hopefully ensure inter regulator coordination and not repeat the SEBI-IRDA spat. In addition, SEBI has announced that it favours a self-regulation model for wealth managers with representation from among the wealth managers themselves. Will it cover the Advisors we don’t know?
With the Indian Wealth Management industry estimated USD 1 trillion and growing aggressively,we will see the benefits of wealth creation spreading to all strata’s of society, increasing the savings penetration in stocks and mutual funds to double digit from the low single digit we have today. When the investor starts looking at market related investments, he/she needs to get the right advise and from a person who is knowledgeable and authorised to provide such advice. To develop the framework for India, I am sure regulations like the FOFA reforms in Australian, RDR in UK and FINRA regulations in USA would be taken into consideration and adapted to suit Indian conditions.
What is happening overseas is a good way to understand what we can expect to happen in India in the near future. I am sure there will be a lot of discussions and debate before the SRO promulgates the framework.
Learning for us in India
Like the United States we see that there are multiple examinations one has to pass to be able to offer products or advise to clients in United Services. To some extent in India we have product level certifications for Mutual Funds, Insurance, and Capital Markets etc. But there is still no regulatory requirement on any financial planning type of qualification. Will it happen in the future, possible!. As of now we have noticed that National Institute of Securities market (NISM)in association with FPCIL has launched a Certified Personal Financial Advisor (CPFA) Examination as part of its portfolio and is voluntary in nature.
The RDR program in United Kingdom is not difficult to relate to for IFAs in India. As mentioned we saw the 1st major change in August 2009 where regulations on commission pay-outs were announced. Post that many smaller changes have been announced which is impacting the way business is being done. The changes happening in UK due to the RDR program being implemented sounds familiar to us. In India we are seeing some level of IFA consolidation happening where some IFAs are selling out their portfolios. Many IFAs are looking at adopting technology in order to fight competition and position themselves to be able to charge a fee from clients with superior value added services. Even though India is a different market from UK, the challenges the community faces seem similar and the way to address them also seem to gel with what we see happening around us
The IFA channel currently contributes 1/3rd of the AUM in the Mutual Fund Industry and if we classify Life insurance agents as tied advisors they contribute more than 50% in the insurance industry. The IFA channel has a bright future and is estimated to grow manifold in the coming years and continue to be one of the key pillars in the financial services distribution structure.
However we are seeing tough times currently with IFAs moving out to other lines of business , changing business product mix and target segments. Going forward what are the types of changes we can envisage. We could witness categorisation of IFAs like we see in UK under the RDR program and in Australia under Future of Financial Advise (FoFA) program . These changes will impact the level of knowledge IFAs will need to gather in the coming years. So it would smart business strategy to keep tabs on how the RDR and FoFA program is rolling out in UK/Australia as it could be a precursor of what we might witness in the Indian market in the near future.
At Infinite Touchbase we are committed to enhancing the KNOWEDGE QUOTIENT of all distributors /intermediaries so that they can bring a difference to the life of their clients even before regulation makes it mandatory. Our multitude of training programs as can be viewed in our website http://infinitetouchbase.com/corporate.html which helps in building the selling and technical skills across multiple product lines.
One program that we offer currently is Chartered Wealth Manager (CWM) form American Academy of Financial Management (AAFM) which is one of the most comprehensive and relevant Wealth Management program in the country. For details visit our website http://infinitetouchbase.com/charteredwealth.html
A quote from Henry Ford sums up the quest for knowledge – Anyone who stops learning is old, whether at twenty or eighty. Anyone who keeps learning stays young. The greatest thing in life is to keep your mind young.