It has been more than 5 years since the Securities and Exchange Board of India (Sebi) has been wanting to regulate distributors and financial advisers, one way or another. The Sebi Investment Adviser Regulations, 2013, too has been followed up by three consultation papers to strengthen it. As the regulator and participants debate over how investors should pay for advice and how sellers should get compensated, often trends in developed countries give us clues to which way the wind is blowing. Shawn Brayman, president and chief executive officer, PlanPlus Inc., a Canadian company that specialises in making financial planning, risk profiling and robo advisory tools for financial advisers, spoke to Mint about some trends in advanced markets.
Do many investors go to financial planners and advisers in countries such as the US, the UK and Australia? Or do they prefer to go direct?
In developed markets, most investment solutions have been and continue to be delivered by advisers or intermediaries, although the trend is that the percentage of the overall market managed by advisers is declining. In Canada, for example, according to Investor Economics, in 2006, 46% of wealth was “advised” and about 8% was direct. The rest of the market was group segregated funds (not individuals). By 2016, 42% was adviser driven and 12% was direct, and the expectation is this trend will continue. Most figures show that the growth in wealth is in direct investment but that clients with advisers are not abandoning that channel. Although there is big media hype on robos (robo advisors), only $130 billion of $50 trillion of retail wealth in North America sits in these vehicles.
How is the adviser-distributor community divided in these places?
Each country has its own dynamics, but for the most part in developed markets, advisers will be multi-licenced in investments and insurance and they use financial planning or advice to provide a holistic ability to meet multiple needs. In Canada, there are about 1,00,000 advisers and about 24,000 are financial planners. Of the 1,00,000 about 44% hold an insurance licence, 33% work through a broker or dealer as a financial adviser, 13% work in bank or credit union branches and another 10% would be full service brokerage. The US is similar, with about 3,00,000 advisers and 70,000 certified financial planners (CFPs).
As the industry matured, there was no large pot of money in fixed deposits where advisers could educate clients and move them into equities. Now an adviser convinces a client to move her money from one place over to him and this is driven by service, advice and expertise.
In India, Sebi wants to separate investment advisers from distributors. Its third white paper on investment adviser guidelines aims to bifurcate the two activities. Is the same trend visible abroad?
I would not describe this as the same trend abroad. In many countries, the regulators’ approach is much more dramatic—ban all embedded commissions. We have seen this enacted in countries like the UK and Australia, and proposed in Canada. We are also seeing proposal for fiduciary or client-best interest standards of care. In many of these markets, the percentage of investment in equities may be relatively stable—25-40% of all wealth in equities markets.
India has very different set of dynamics as this is one of the fastest growing middle classes in the world and there is less than 5% participation in equity markets. This means India still has a “Blue Ocean” for sales of investments as opposed to the need for more sophisticated financial advice. I believe Sebi’s concept—to differentiate sales and advice—is actually innovative and a good one.
The UK banned commissions on financial products starting 2013. What has been the experience? Are investors better off?
The Retail Distribution Review (RDR) in the UK was more than simply banning commissions; it required higher education standards and was a broad-based attempt to move what was sales culture to a profession. Initially, industry fear mongering would have you believe that advisers would be out of jobs, consumers would no longer have access to financial advice, and more. According to Keith Richards, the chief executive officer of the Personal Finance Society in the UK (which represents more than 37,000 advisers), over the 3-4 year period that the commissions were banned, the demand for financial advisers has increased and most financial intermediaries are seeing revenues increase.
The Financial Conduct Authority in the UK acknowledged that there was a decline in the number of advisers post-RDR, but it is hard to know if this was because of commission bans, or the fact that older advisers closer to retirement were not prepared to “go back to school” to meet higher education standards, or due to natural attrition as product margins reduced because of exchange-traded funds. Most of the advisers who left the market were from large institutional players (bank wealth management groups), where the infrastructure to manage direct client billing was not present. Most forecasts are that we will see a 30% or higher decline in advisers in countries like Canada and the US over the next several years, regardless of demographics, technology and regulation. The hope is that Do-It-Yourself or fintech offerings will help fill some of the advice gap, especially for low-income families that traditional advisers could not afford to service.
So the bottom line is, yes, both investors and advisers are better off since the change in the UK.
Do people in developed countries pay, or like to pay, for advice?
We need to be careful with questions like this. People always pay—with embedded commissions or fees. The question is do they know what they are paying and is the method of payment convenient? We also know from the field of behavioural finance that people often attribute different “values” to the same Rs1,000 depending on where they perceive the money came from—did they earn it, win it, inherit it and so forth. In the end, willingness to pay is a function of perceived value.
In every country I have ever visited, advisers argue consumers are not prepared to pay fees, that clients think they can get the same service “for free” when they buy a product. In 2013, as RDR was being implemented in the UK, J.P. Morgan Asset Management did a survey of consumers in the UK and asked consumers: “The cost of investment advice must be agreed (upon) solely by the adviser and you, and product providers must not influence what you pay. Do you approve?” Of the consumers, 59% approved or strongly approved, 10% disapproved and the rest did not know. In short, the issue is more about advisers framing the cost and value that consumers will pay.
If Sebi does prohibit distributors from offering investment advice and advisers from distributing products, do you think registered investment advisers (RIAs) will go back to being distributors, or vice versa?
Again, I think there is a framing issue here. My understanding is that Sebi is not stopping investment advisers from distributing products; rather it is stopping them from being compensated for distributing products. In the US and Canada, where advisers are paid directly by clients, the products to implement have low or no embedded cost of distribution. If the client must pay for the advice and then pay someone else to implement on their behalf, it will not help the consumer. Sebi needs to let investment advisers “distribute products” on behalf of clients but not be paid by those product manufacturers. The reality in most developed markets is that consumers are moving to ETFs with costs of about 30 basis points.
Globally, product margins are declining and technology and robos are providing much lower cost of delivery. Markets are never all one way or the other. I believe smart advisers will want to be ahead of the curve and develop proper advisory practices with clear-value propositions. Some may still go back to old models for as long as they will last. An analogy might be if you were starting a new car manufacturer today in India, would you decide to build an electric car or a new combustion engine? We know the trend will be to electric, but the cars on the road today are mostly gas. Elon Musk looks to the future while others look to the past. Both roads will work (no pun intended). Advisers have the same choice: milk the existing system until it dries up or look to the future.
Sebi’s third white paper on RIA guidelines said that distributors should advise products that are “appropriate” to investors. Is “appropriateness” possible without giving advice?
Recommending suitable or appropriate products requires the adviser know the client, so I do not sell to a low-risk client a 100% aggressive equity product that will backfire later. Yes, I believe distributors can do this job and need to do it better than they do today. A good adviser might help a client understand if she should even buy an investment or should she pay down debt instead? Should they delay their retirement or save more of their income today? Someone who is compensated to sell products has no motivation to have clients pay down debt, whereas a good adviser looking after the client’s best interest should look at many factors in advising the client. I believe clients are better served by a good adviser than they are by a product salesperson, but there is nothing wrong to expect the salesperson to have some reasonable standards of care beyond ‘buyer beware’.
