Globally, the trend in intermediary compensation is moving towards advice-based distribution of financial products, assessed on the basis of needs of the consumer. Right-selling — that is, selling the right product to the right customer (a low risk fund to an elderly person, for instance) — practices would ensure improved penetration.
On the other side, financial regulators, the world over, are focusing on protection of consumer interests. In India, the steps in this direction were initiated by the capital markets regulator Securities and Exchange Board of India (SEBI) in August 2009, when it made all mutual fund products no-load. The same year, the Swarup Committee on Minimum Common Standards for Financial Advisers and Financial Education recommended a road map to substantially moderate commission structure on insurance products in phases to ultimately make them no-load from April 2011.
Similar views are also being implemented by the Financial Services Authority (FSA) in UK. Other global regulators are working together with the International Organisation of Securities Commissions (IOSCO) to evolve comprehensive regulations of the markets and securities industries and to have a convergence of regulations across financial products and services with consumer’s interest at the centre.
The question is how to compensate intermediaries. For this, we at Financial Planning Standards Board India has a model. A certified and regulated financial planner makes a plan for a customer and charges for that advice. Based on this advice, the customer buys financial products, all of which carry no-loads. If the planner gives a wrong advice, he would be held accountable. Here’s a seven-step path to right-selling:
One, remove upfront commissions on all financial products or reduce them significantly to discourage mis-selling.
Two, regulate advice and financial advisers by enforcing fiduciary standards and obligations on them.
SEBI has come out with a concept paper to achieve this with its Self Regulatory Organisation (SRO) model, which should be implemented immediately.
Three, the proposed SRO should have jurisdiction across all financial products and services to have oversight of insurance, pension and mutual fund advisers, among others. This will happen when other regulators also recognise the SRO. Hence, SEBI becomes the facilitator.
Four, regulate the nomenclature “financial advice”, “investment advice”, “financial planning” and so on to protect consumers from those who are not authorised to advise on the strength of a suitable certification. All advice should be certified.
Five, promote financial planning as a holistic, fee-based and advice-based service having the same ethical standards as medicine, law and accounts. This will promote a culture of fee-based advisory services, where the compensation element shall be a product of value-added by the adviser rather than based on a fixed sum or percentage of amount invested.
Six, launch financial literacy campaigns to raise the level of financial awareness and education which empowers the financial consumer.
And seven, include financial planning in schools and colleges as part of the curriculum.
India has tremendous potential in directing the financial savings of its masses in appropriate channels so that they have financial security, wealth creation and the adequate risk protection. The economy gets the boost with a stronger industry accessing capital at a reasonable cost. The markets add depth in terms of number of long-term players and the volume of business. Above all, this is aimed at the financial well-being of the end consumer.
The writer is vice chairman and CEO, Financial Planning Standards Board India. Views are personal.