Gone are the days when your Life Insurance Corporation (LIC) agent (read friendly neighbour) used to help you plan your daughter?s marriage or your son?s medical college admission. There?s a new breed of financial planners (FPs) in town – bearing the title of Certified Financial Planner (CFP) ? who will help you solve your diverse financial goals.
But even as the Securities and Exchange Board of India (Sebi) is in the process of transforming the financial advisory sector by certifying FPs, a few questions remain. For example, there are issues about the regulation and, even if that is in place, who will regulate FPs? What experts are also asking is whether financial advisers should be allowed to sell financial products in the first place.
But first, what is financial planning? According to Ved Prakash Chaturvedi, managing director, Tata Mutual Fund, ?Personal financial planning is a process of developing strategies for using financial resources to achieve short as well as long-term goals.?
During the last five years, financial planning has grown and developed by leaps and bounds. ?Financial planning helps an investor to develop well-defined goals and chalk out appropriate strategies to turn dreams into reality.?
But very few financial planners know the nitty-gritty of financial advisory. Even investors, who go to CFPs, are not savvy about what he should expect from an adviser.
Dhirendra Kumar, CEO, Value Research Online, highlights one of the most important aspects about FPs. He feels that in India there should be a clear cut demarcation between a FP and a financial adviser, who at times also sells financial products. ?There is conflict of interest between an FP and an adviser. The adviser will have his own intention to sell, thus generating more revenue for himself. There is nothing wrong in that, but then he must state his intentions or disclose his intention to the investor before suggesting him a particular product.? He said it is important for investors to go a specialist who will help them grow resources.
But what happens when the FP gives wrong advice and the investor suffers losses? Can the FP be made accountable?
Dhirendra said documentation may be the answer to this issue. ?Just like a doctor will document what medicines he is prescribing, an FP should provide a document to the investors as to what advice he is giving. If this is followed, then the investor can question and hold the FP accountable, if the fruits of investment turn sour.?
Documentation will also enable the investor to be responsible to follow the suggestion given by the FP, he added.
Under the Sebi Act 1992, Sebi has the power to regulate investment advisers, but so far it hasn?t drafted any regulation. This March it came out with a consultative paper on regulation for investment advisers.
In the concept paper, Sebi said a private sector self-financing regulatory organisation (RO) should be created to be the first level regulator for investment advisers. The RO should develop principle-based regulations with risk-based examinations and implement regulation of discrete market segments in phases. The RO should publish regulations defining the process for regulation and registration, entry and exit, reporting and market conduct.
The Financial Planning Service Board (FPSB) has sent a proposal to Sebi, agreeing with the market regulator?s suggestion for a private sector regulator for investment advisers and has said that it is capable of taking up the role of a self-regulatory organisation (SRO). At present, there are different regulators for distributors of different products. For instance, Insurance Regulatory and Development Authority (Irda) regulates insurance agents and Sebi regulates stockbrokers and mutual funds (MFs). However, investment advisers and consultants are unregulated.
FPSB has pointed out the lack of laws to govern the financial planning industry. It proposes a supervisory mechanism with a well spelt-out code of ethics. Such a code should comprise matters of integrity, objectivity, competence, fairness, professionalism, diligence and compliance among financial advisers.
Experts said that another crucial conflict that exists in the field of financial planning is that, ?Sometimes it is a case of what is right for the investor versus what will be right for the adviser.”
He said that as the market integrates, the real challenge will lie in managing different regulatory aspects.
Explaining the difference between an agent and a CFP, he said the former is an agent of a company. But an FP studies an individual?s financial background and needs and like a doctor gives solutions to problems.
Advice and selling are two different tasks and require different skill sets. Different regulators should certify them separately. The regulator should also acknowledge a common certification, which fulfils the requirement of an investment adviser like CFP or Associate Financial Planner (AFP) to bring about some uniformity, said experts.