Change has been looming for quite some time in the financial services space. SEBI has been an active regulator for some time now. They brought in the Investment Adviser Regulations 2013 and wanted to bring in a class of advisors who are fiduciaries.
At that time, they had allowed advisors to also segregate their distribution setups and operate on an arms-length basis, within a corporate setup. Individuals had segregated their practices by roping in relatives who were doing the distribution function. SEBI probably allowed this as it took the pragmatic view that pure fee-only advisory cannot just spring out of the ground, just on the strength of regulatory fiat. It has to be allowed to take shape, evolve & grow. Now, it looks like SEBI feels the time has come for it to move the regulations to the next level.
There is a consultation paper now (third one, in fact), which seeks to completely segregate advisory & distribution. It does not want corporate entities to do both distribution as well as advisory, even through separate departments or even subsidiaries. According to this paper, even associate companies, where the director or partner of an advisory entity has 15% or more stake, cannot provide distribution services. Similarly immediate relatives of individuals who are in advisory, cannot offer distribution services. Existing Registered Investment Advisers ( RIAs ) have till 1/4/2019 to decide and migrate to advisory or distribution. This paper also specifies that MF Distributors cannot provide advice; they can explain the features of the product & shall ensure the principle of appropriateness for the products suggested.
But, is such a segregation possible now & is that desirable? It is reasonably clear that if the advisor does not distribute any product (does not receive any commissions), is fee-only & is a true fiduciary acting in clients’ best interests - it is truly an ideal situation for the clients. An advisor in this scenario, would suggest Direct plans (which are lower in cost for clients) & even help execute it for clients. Some have interpreted that advisors cannot execute any transaction - that restriction would most probably be for commissionable products only. A clarification is expected on this. Also, a non-commissionable class of products is required in every category like insurance, PMS, fixed deposits, etc, for fee-only advisors to deal in.
For all services rendered, the advisor would charge a fee. This makes the service & the payout clear & transparent. It places the onus on the advisor to offer excellent quality services - else the client could move away. This empowers the client - who is now in control of what s/he receives & what s/he would pay for it.
It is clear that consumers at large would benefit from this. The main point of contention is whether consumers are ready to pay for services.
Consumers are already paying for various kinds of advice/ services – to doctors, lawyers, architects, gym trainer etc. Paying for services rendered is hence fairly common. There are services which most of us use regularly - drivers & maids. They are an important part of many households & no one grudges their salaries. Over the lifetime, the amount paid to drivers & maids runs into crores of rupees! These are transactional services & yet people pay for these services. Services the advisors offer are vital & transformational. With a proper bouquet of services, clients should have no inhibition in paying for them. What & how advisors charge - whether on a lump sum basis or asset under advice based fee can be decided by the advisor & client mutually.
Basic investment advisory has become a commoditised service. Online platforms (Robos) are able to do this at virtually no cost. Algorithms & artificial intelligence are moving higher up and are doing many things which a financial advisor does – like risk profiling, appropriate asset allocation, selection of investment candidates & seamless execution and reporting. In fact they even remind clients, around the time they get a bonus or if huge amounts are lying in the bank.
Robos have claimed the basic & even middle ground in investment advisory. Advisors need to move to higher ground and offer such services that Robos will find difficult to offer. The entire domain of managing behavioural & emotional aspects of a client is an area that advisors can own and excel. Advisors can offer many services like - loan advisory, estate planning services, life planning services, financial therapy, life transition counselling and assistance etc. These will be truly valuable for clients and can very well be charged. Advisors should now start using technology to their advantage to save time & move on to more significant areas for their clients.
Customers at large require high quality advice. And they will pay - like they have been paying advisors all these years. Advisors will need to make it truly worth their while and clients will pay. Advisors will have to be willing to embrace change, be willing to learn & scale-up and offer high-end services to clients. Clients will keep the right advisors in business. There is a glorious future out there, for the right advisors.(The writer is founder of Ladder7 Financial Advisories)