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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

Online financial advisers will need regulatory support

Online financial advice will drive a lot of regulatory innovations.

To make sure that the investment advisory services work in the best interest of consumers, Securities and Exchange Board of India (Sebi) has framed a new set of regulations that advisory firms should comply with. These regulations state that investment advisory firms should:

•Separate the process of investment advice from execution of financial products

•Comply with code of ethics and standard practices

•Provide transparency in the process of investment advice

•Disclose the conflict of interest to their clients where and when it occurs.

The new regulations can be termed as a move to curb the current transactional nature of the investment advisory firms. The common man for long has been a victim of product-centric and sales-oriented financial advice. The lack of holistic approach in the market is evident in the advice consumers receive. The investing consumers deserve a service provider who can understand their financial needs and work for their benefit. This can only happen by overhauling the product-centric nature with a client-centric approach. These new regulations are the first baby steps to create a more consumer-friendly personal finance ecosystem. These regulations can give the necessary impetus in creating a group of qualified financial advisers who can serve in the best interest of their clients.

Some of the existing and futuristic financial advisory firms have already embedded the set of regulations by virtue of their principles. The challenge for such client-centric advisory firms lies in serving the large and rapidly growing Indian middle class. The middle income professionals need quality financial advice to channelize their limited financial resources towards achieving their goals. Cost-effective, accessible and reliable advice is the need of the hour. However, it is not readily available currently. We need innovations which can change the face of personal finance. Online technological development is an example of such innovations which has the capability to revolutionize the way personal finance is delivered to the end consumer. The future of investment advisory lies in the efficient usage of online technology and standardization of advice delivery limiting human error. Such new innovations will leapfrog the existing system and bridge the gap of accessibility. The move to automate financial planning process and make it available on an online platform at low cost can prove beneficial for the middle class professionals.

Due to lifestyle changes and internet penetration, online banking is rapidly being accepted by consumers as it is convenient and reduces dependency on physical visits to the banks. However, online financial advice is still at a nascent stage not just in India but across the globe. Consumer centricity should be the corner stone of this new breed of online financial advisers. The advantages of such online financial advisory companies are:

•Accessibility and availability to everyone.

•No minimum investment requirements.

•Providing holistic financial advice.

•Transparency in the financial planning process.

•Execute only the advice approved by the standard norms.

•No scope for miss-selling.

However, the online financial advisory firms will need regulatory support in implementing their innovative business models. Due to lack of regulatory view on online financial advice, there are hindrances such companies face. These include:

•Rational of arriving at investment advice signed and dated has positives for an offline advice model. However in an online space, this can prove to be a hindrance. Storing such documents will become a problem for consumers and companies.

•Requirements like know-your-client which need the physical presence of the investor for verification. India has 640 districts and it might be a disadvantage to new players who want to introduce innovations in current marketplace.

•Online identity verification would also need to be addressed.

The new regulations do not address these issues faced by the online financial advisory firms. Given the potential such online models have in providing quality financial advice to a much larger base, it is inevitable that the next round of regulations should address some of the concerns faced by online advisory firms. The regulatory systems across the globe will eventually chalk out a future ready set of regulations in a gradual manner. Online financial advice will drive a lot of regulatory innovations as well.

Nitin B. Vyakaranam is CEO and founder, Artha Yantra Corp. Pvt. Ltd.

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