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Distribution And Advisory In India

It is hard to imagine a world without financial advisory. In a global research conducted across 19 countries, covering over 19,000 investors — eight of 10 people demonstrated the need for value addition that financial planning brings in reaching their financial goals

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It is hard to imagine a world without financial advisory. In a global research conducted across 19 countries, covering over 19,000 investors — eight of 10 people demonstrated the need for value addition that financial planning brings in reaching their financial goals. However, two out of three investors do not know how to translate this into an actionable plan; and in effect turn to family and friends for advice. In India, financial literacy is still in its early stages. Not many know what role distribution can play within the overall financial plan, and what should be the road ahead in the segregation of distribution and advisory.

Before we dive deeper, it is important to first define the term “financial planning”. Financial Planning Standards Board (FPSB) defines financial planning as a “process of developing strategies to help people manage their financial affairs to meet life goals”. Charting an effective financial plan is a six-step detailed process and can be best implemented with the help of a qualified financial advisor, though not mandatory, to achieve good financial outcomes. The six-step financial planning process is as below:

1. Establish and define relationship with client
2. Collect client’s information
3.Analyse and assess client’s financial status
4. Make financial recommendations
5. Implement and execute recommendations
6. Review client’s situation.

Effectively, the process of execution or distribution is part of financial advisory. Globally, there has been a ground-level shift from the commission-oriented distribution model to the fee-oriented advisory model. It has clearly aligned “investor-interest” with “advisor-interest”, thus ensuring outcomes that are a win-win for both the investor and the advisor.

Different countries have followed different roadmaps for this shift, and India could take it’s learning from the various implementation models. The US followed a market-determined model without significant regulatory intervention, wherein the capability of advisory was first built through a rigorous certification and education process for advisors followed by a nudge-oriented shift towards advisory. The UK, on the other hand, followed retail distribution review (RDR) implementation through a defined time-frame model with a shift to financial advice. Though the UK had a clearly defined time-frame for this shift, some research showed that the migration needed more hand-holding in the shift towards advisory as the retail end of the market did not grow in the ensuing time-frame.

In India, Securities and Exchange Board of India (Sebi) has been pro-active in aiding this shift towards advisory. It will be fair to say that India has begun to transform itself from distribution to advisory, though currently only limited to mutual fund distribution. This is a clear gap, which indicates that the shift cannot be product specific, and must encompass all products and be preceded by upgrading distribution with enhanced certification and learning modules.

Sebi’s recent discussion paper on the roadmap it wants to plan by completely segregating distribution and advisory for mutual funds has seen spirited discussions among various market participants. Both Association of Mutual Funds of India (AMFI) and United Forum of Mutual Fund Distributors have responded to the discussion paper with why the current Sebi proposal of complete segregation may not be immediately suitable for the Indian markets. Though resistance to change is always expected, the strong push-back seen in the Indian scenario does call for building a consensus across market participants and incorporating their feedback and recommendations in the final regulations that are formulated.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Sanjay Sachdeva Zyfin

The author is Global Chairperson of FPSB and Chairman, ZyFin Funds

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