Financial literacy among wealth managers needs to improve: report

India is a price-sensitive market and since the wealth management industry is at a nascent stage, investors are extremely value conscious and particular about the alignment of the price charged by financial advisors with the value being delivered


Thinkstock
Thinkstock

There has been a significant rise in the number of high net worth individuals (HNIs). India has the world’s fastest growing HNI population (individuals with over $1million in investable assets) both in terms of the number of individuals and wealth. A report on the state of the Indian wealth management industry by Cafe Mutual, an independent forum for mutual fund professionals, and EY, Winds of change: Wealth management reimagined, says that to realise the industry’s true potential, several issues need to be addressed as the wealth management space evolves further.

India is a price-sensitive market and since the wealth management industry is at a nascent stage, investors are extremely value conscious and particular about the alignment of the price charged by financial advisors with the value being delivered. Moreover, millionaires in India are not accustomed to paying a fee for wealth management advice. Hence, the fee-based advisory model has not picked up. Domestic wealth managers, particularly large private banks, refrain from offering fee-based advisory services and instead focus on commissions from transactions. Wealth managers in India mainly sell mutual funds, private equity funds, real estate funds, non-convertible debentures, portfolio management services, structured products and tax-free bonds.

The Indian wealth management sector is characterised by a category entities called national distributors (NDs), which are large multi-location, multi-product companies. Some NDs are affiliated to brokerage firms and have a strong network of sub-brokers. NDs offer significant support to independent financial advisers (IFAs). IFAs can leverage the strong infrastructure platforms and distribution reach to focus on client acquisition and business development.

However, there are very few qualified financial advisers in India. According to a survey by the National Council of Applied Economic Research, 67% of investors in the country rely on informal advice for their investment decisions. In India, there are 1,834 CFP-certified professionals (as of March 2016) catering to a population of more than 1.3 billion. Around 58% of certified financial planners (CFPs) have less than 10 years of experience. And, 74% of CFPs are from the top eight cities, with maximum concentration in Mumbai.

Further, the Indian wealth management industry lags heavily behind global counterparts on educational standards for financial advisers. There is a need for a strong campaign by regulators to enforce the need for certified distributors. Recently, there have been some initiatives in India to strengthen the skill sets of financial advisers. For instance, IFAs formed a national body, Foundation of Independent Financial Advisors in 2012. It functions as a knowledge sharing platform for IFAs as well as professionals. Moreover, a number of certification requirements have been introduced. But there is a need for a strong campaign by regulators to enforce the need for certified distributors.

Mis-selling is one of the key issues plaguing the wealth management sector, making investors wary of advisers. Mis-selling occurs partly because of a lack of financial literacy among customers and partly because of a tendency among certain relationship managers to push products that fetch higher fees. Earlier, distributors were paid upfront fees at the time of investment and trail fees as long as the investor stayed invested in a staggered manner. As certain wealth managers had resorted to churning investments in order to gain from upfront commissions; Association of Mutual Funds of India issued a circular in 2015 to cap upfront commissions at 1%.

The regulatory environment in the Indian wealth management industry is still evolving, with a number of regulations aimed at protecting the interests of investors. After the announcement of the investor advisors guidelines by the capital markets regulator, there has been increased focus on client centricity, fiduciary responsibility and compliance. Regulatory requirements regarding adviser qualifications, infrastructure, risk profiling and suitability criteria have become more stringent.

Edited excerpts from Cafe Mutual and EY report, Winds of change: Wealth management reimagined.

More From Livemint