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Call for regulation of investment advisers

Call for regulation of investment advisers
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First Published: Thu, Jul 12 2007. 12 30 AM IST
Updated: Thu, Jul 12 2007. 12 30 AM IST
New Delhi: The first time Gaurav Mashruwala, a Mumbai-based certified financial planner with 15 years of experience, sits down with clients, he gives them a choice: do they want his advice or his products?
Overlap between financial advisers and distributors is the norm in India’s financial services industry. But concern over potential conflicts of interest is bringing pressure—both from inside and outside the industry—to formally regulate those who provide investment advice.
Mashruwala is quick to agree that the system is ripe for change. Under the current structure, he says he is careful to explain the process, insisting that his clients be informed of their options, as well as aware of his commissions. But, he says, the role of regulation should be to segregate between selling advisory services and financial products.
“If regulation is able to do this, then regulation has meaning,” he said. “It will be useful for all stakeholders: government, advisers, distributors and consumers.” Otherwise it will just be an additional layer of legislation, he adds.
As the ministry of finance finalizes its approach paper on regulations for investment advisers, financial circles are abuzz with a key question: can a vast, undefined and growing community of financial planners be regulated?
The government guidelines may follow the structure of the US Securities & Exchange Commission, which mandates full disclosure of information and requires investment advisers to register.
The ministry of finance declined to comment on the specifics of the guidelines.
Most agree that India’s financial services industry demand transparency and Indians, rich and poor, urban and rural, need to attain higher levels of financial literacy.
But they wonder how to realistically enforce regulation to maintain accountability amid market whims. Many question what incentive exists to provide unbiased, independent advice.
Yet the free flow of information is necessary for the development of efficient and transparent capital markets, observers generally agree.
Dhirendra Kumar, chief executive of Value Research, an independent mutual funds research firm, advocates a code of conduct requiring investment advisers to disclose all financial stakes and risks upfront.
How one conducts business is more significant than microsupervision of advisers, says Kumar. A code to establish universal standards across the industry is critical , he says.
“An intermediary makes money when something is bought and sold,” says Kumar. In other words, certain financial transactions may not be in the best interest of the customer, but may bring financial returns for the adviser.
Currently, financial planners—a relatively new profession in India—do not operate under direct regulation and there are no guidelines outlining ethical practices.
For example, an investment adviser is not required to disclose his or her source of income or commission earned from selling particular financial instruments.
“This allows a lot of flexibility in business operations, but at the same time is very dangerous from the investors’ point of view,” says Rajiv Deep Bajaj, managing director of Bajaj Capital Ltd, an investment advisory and financial planning company based in Delhi.
Bajaj, himself a certified financial planner, has said he supports the professionalization of the financial planning industry through training and certification.
Only 265 certified financial planners are listed with the Financial Planning Standards Board (FPSB), the industry’s professional membership and certification organization.
However, the number of people supplying investment advice far exceeds the few hundred who have voluntarily registered with the FPSB.
An estimated 60,000 mutual fund distributors and more than 700,000 insurance agents also disseminate financial planning services, according to current membership figures from the Association of Mutual Funds in India and the Insurance Regulatory and Development Authority (Irda), respectively.
The certification offered by FPSB is voluntary and is awarded to individuals who complete a specified sequence of education and work experience in conjunction with a series of examinations.
More than 6,000 people are in the process of earning certification, which takes approximately a year and a half.
Bajaj also advocates education on behalf of consumers to increase financial literacy.
The risk, Bajaj says, is the questionable advice delivered to investors who are not very financially savvy. “When these two things collide, this occasionally results in misselling,” he says.
Given this challenge, ensuring transparency and greater disclosure is essential to the industry’s growth, says Kumar.
In the next decade, the financial services industry will play a critical role in driving India’s growth, says Bajaj. “The key to growth,” he says, “is purchasing power, and higher growth leads to higher risk-taking which in turn needs advice.”
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First Published: Thu, Jul 12 2007. 12 30 AM IST
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