Home / Opinion / It takes decades to build a profession

Many of us in finance have noticed the synchronicities of its issues with health. Medicines, like financial products, are used to solve a particular problem that a person suffers from. The diagnosis is a skilled job that keeps in mind many other issues that may be unrelated to the pain in the head at first glance. The relationship is based on the patient trusting the doctor for his professional skills and due diligence. The retail financial market is similar. For instance, the problem of solving just one financial issue, while ignoring the rest of the financial life, leads to bad outcomes.

Institutions that have worked to provide micro-pension products to rural women say that just providing a pension, in the absence of an emergency fund or a shorter-term investment product, is actually harmful. Women think they are saving, they agree to save long-term, but when an emergency hits and they cannot withdraw their savings, they lose trust in modern financial products. The fault, if any, was of solving just one problem without looking at providing a fuller solution.

I recently read a paper by Nicholas Bagley in the Michigan Law Review titled ‘Medicine as a Public Calling’ (http://bit.ly/2dO1KL6), where Bagley argues for regulating the medical industry as a public utility. He says that if what is termed as a ‘public utility’ satisfies two basic considerations—“first, that the business in question met an important human need; and second, that some feature of the relevant market presented the risk of oppression"—then medicine is indeed a public utility and must be regulated as such. But the part that I found interesting was the background note on the emergence of the modern mega-hospital-plus-insurance-based American health system.

We take the respect and high incomes of current-day doctors as a given, but Bagley documents that these are the result of a deliberate effort to turn a practice into a profession. Till the 1870s, hospitals in the US little resembled modern hospitals— they were institutions that were the last resort of the very sick. “Hospital cleanliness was unknown, nursing was unskilled...major surgery was performed only in dire emergencies...patients dreaded the hospital...." This changed over the next 40 years as medical schools became more rigorous and doctors turned to hospital practice to enhance their public prestige and improve their private practices, he writes. It took till the 1890s for “physicians (to) secure state licensing laws that restricted entry into the profession. Building on that foundation, physicians began a painstaking effort over the following decades to consolidate their status and power." The big doctor salaries of today were unknown even till the Great Depression. “In 1929, for instance, the average net income for non-salaried physicians was some $5,200, or about $71,000 in today’s dollars. (That figure stands at $190,000 today)."

There is a lot of unrest in the Indian financial intermediation market today over the market regulator’s consultation paper that wants a clear distinction between an adviser and a distributor. While reading the paper on medicine, I could not help but look at the similarities between the two industries and the struggle it is for those who come in early at the start of a profession.

Sellers of financial products are not universally trusted. Some people have good outcomes if they chance upon a good distributor, but that is not the industry standard. Mutual fund independent financial advisers (IFAs) have done well, and this paper regularly carries success stories of people who have been served by them. But for every ‘good’ guy there are 100 snake oil salesmen peddling tips and selling the market’s current flavour. They’ve been unable to go from product peddling to portfolio creation.

Professions take decades to get established and respected. India is at a very early stage of turning a product-push market into a profession. Today, the heavy lifting is being done by the capital market regulator in pushing the intermediation industry into this. Other regulators will fall in line over time. Many other macro changes are also taking place. But today, for the IFA industry in turmoil, the writing on the wall in the global markets is similar to what we read in India. Remember, every change in the industry was followed by dire prophesies of a dead market. It happened when M. Damodaran banned the upfront 6% new fund offer charge in 2006. It happened when C.B. Bhave banned the upfront commission in 2009. It happened when upfronting was capped. It is happening again now as the Securities and Exchange Board of India (Sebi) pushes the distribution industry towards a profession. The IFAs providing value will swim through.

End Note

As more and more people get cheated by their banks, they realise the need for a financial planner. Mint carries a feature called ‘My Plan’ (http://bit.ly/2esTLl8) that documents the stories of people who had a financial problem solved by a planner. We get calls, emails and messages from readers, friends and family for referrals to planners. There is a conflict of interest in recommending one over the other. Can the financial planning industry come together for a system of robust rankings that can be used by clients looking for a planner?

Monika Halan works in the area of consumer protection in finance. She is consulting editor Mint, consultant NIPFP, member of the Financial Redress Agency Task Force and on the board of FPSB India. She can be reached at monika.h@livemint.com.

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