India is a growing economy and therefore it is expected that the per capita incomes will rise in the coming decades. This also means that there will be growth in Savings and impetus to financial investments will be there. Retirement planning will become important as the young brigade today wants to earn handsome and retire early. This puts focus back on the regulatory in various facets of the investment industry i.e. stock markets, mutual funds, insurance and also real estate (especially when REIT’s are round the corner).
What is the Job of a regulatory?
In short, their role is to ensure that no investor is given a raw deal and the investment experience is positive.
When does the investor experience become positive?
When his financial needs are understood, strategies to fulfill those are implemented and monitored in a client-beneficial manner.
What has been the reason for not so good client experience?
The organizations involved in financial services look up to their monthly/quarterly performance and with high costs of employment, the focus has been on revenue rather than quality of advice.
The regulators in India have seen three phases:
- Silence phase: Since the emergence of financial services in 2001, there was mass selling quote unquote “mis-selling” as well and regulator at that time let things happen. Resulting lot of people had a horrible experience of investing.
- “I am here” phase: when lot of complaints started rising, these regulators did some patchy work by signalling that they are present. These changes did not address the real issue and the distributors/advisors of these financial services made merry.
- “Mad hunting” phase: Now the regulators are trying to copy some country in the world and making useless changes in them and forcing the issue. This is killing not only the genuine advisors, but the advice as well. The professionals may gradually choose much greener pastures and start to find a loophole within the system to sell products.
A congenial environment means where there is coexistence of the advisor and the client where value add happens for the client and survival of the advisor is also ensured.
What is Value Add?
It is not always visible on paper because many a times advisors also recommend clients “what not to buy or invest in”, other than telling them what to do. How does the regulatory acknowledge this fact?
Financial Education is an integral part of advisor-client relationship and how does the regulatory acknowledge this?
In mutual fund industry in India, the regulator wants to differentiate between the seller and the advisor. How can they exist in isolation with each other. Making things complicated isn’t going to benefit anyone. The regulatory all across have to understand the reason why anybody will hire an advisor. It is not for the fact that all clients do not know anything about money, they have earned it and know more about it than the advisor. The biggest reasons for hiring an advisor are “transfer of decision making stress” and “detachment from sentiments“.
The day regulatory understands this, it will be able to define the correct position of an advisor. By its measures, various regulatory bodies are already making a statement that the common Indian investor is intelligent or dumb enough. How can a regulatory be judgmental on the acumen of the masses and treat all intermediaries like they are all demons.
I wonder the reason why there is no regulatory in the medical profession in India, which can look after the interests of people taking services of Doctors and Hospitals. There is a strong internal body in medical services, which takes actions as they deem right. If government is happy with that setup, then why to look at financial services in isolation.
I do not understand the difference between a distributor and an Advisor. How does the regulatory control the intent here…..no way. The premise is to control action and even in this setup, one can give wrong advice. In the longer run any business association can only survive if the client sees value add happening.
Every client is smart enough to understand this and a genuine advisor will always look at growing his business with happy and satisfied clients. One with shortcuts wont exist for long, if the regulatory brings in smart measures. For e.g. if the brokerage on all MF products is the same, then no advisor/distributor has any benefit of selling a capital protection fund or a hybrid close ended fund just for the sake of revenue. Merit should be the filter, not revenue. By allowing variety of revenue models to flourish, the regulatory on one hand has left holes in its own sheets.
Look at the real estate regulatory which has been formed after the damage has been done. The revenues in so many places was in excess of 10% of the deal amount, and even a road side street guy could become a real estate broker. Whats the fun when many people have even lost their retirement money with some spurious builders.
Look at Insurance for example, where the banks continue to sell it because the regulatory has had numerous loopholes which the intermediaries have taken full advantage of. Lets look at the ULIP fund performance for instance, where the returns of the funds are depicted as the returns for the clients which is false. The ULIP fund NAV performance are half truth as they do not depict the policy returns, where much of the premium is paid as charges. I wonder why should a ULIP, even be a product in insurance and upon that we have the opaque structure of the traditional policies, where the returns have been dismal. Some studies show that on a past 20 year period, when the Govt Bond rates were even higher, the IRR (internal rate of return) on these traditional policies was less than 6.00% p.a.
There the regulatory felt that the policy buyer should know the facts, but a different perspective is adopted when it comes to mutual funds, which are more transparent in comparison and are a better route for investments for small to ultra HNI.
No rules are there for private placement Venture Funds, real estate funds and other alternate products where the transparency is quite low.
Look at the divide between the MF industry itself. The regulatory now wants the distributor to get a declaration signed saying “the distributor may not be acting in your best interest” but at the same time the Fund Manager who is going to manage the fund may still earn crores of salary without providing any return or any such declaration.
I hope sanity prevails and we have controls on the systems rather than extinction of a community, which is essential in the current scenario our country is passing through.
“As long as wealth is there, wealth advisory will remain”