Small investors would rather go for free financial advice, regardless of its quality, rather than pay for it. Do you see this changing any time soon?
The culture of seeking expert financial advice is not widespread in our country. Those of us who do take such advice would not like to pay for it. This is because the functions of advice and sale are mostly combined and the financial adviser gets his fee from the commissions embedded in the price of the product. This practice gives a false impression to the consumer that he is getting free advice. With greater financial literacy, this will change.
Financial planners are perceived to be only for the rich. Can it be viable for them to also take up small-ticket investments?
In due course, it will be. As the habit of saving and investing spreads, financial planners will also service small investors. The volume will drive the business, that is, a large number of people investing small sums of money, not a small number of affluent people investing large sums of money.
Should professional financial advice and commissions earned through products be completely different functions?
Absolutely. This is why PFRDA and Sebi banned entry loads in NPS and mutual funds in May and August 2009, respectively. The commission included in the price of the product is one of the main causes of mis-selling.
Some financial planners have also adopted a model, wherein they earn from commissions from investment products. Do you think there is a conflict of interest?
There is an obvious conflict of interest if the financial planner recovers his fee through commissions paid by the product manufacturer. An adviser is likely to push the product that gives him the highest commission.
How important do you think is certification for a financial planner?
With a view to attaining and maintaining a high standard of ethics, professional knowledge and expertise, certification of financial planners is essential. This is the main function of FPSB and I understand it is doing a very good job compared with the global standards.
How can FPSB ensure that objective financial advice is given to clients?
Independent and objective financial advice can be assured only through reformed incentive structures and by regulating the profession of financial advisers and planners. The Committee on Investor Awareness and Protection, appointed by the government, has made several practical suggestions in this regard. When enforced, these measures will go a long way in protecting the interest of investors.
In a country like India, where financial literacy is low, should there also be a regulatory mechanism to check mis-selling by planners?
The practice of mis-selling is, to a large extent, inherent in the prevailing system of paying commissions to the adviser/seller. Till this changes, you will not witness a major improvement. Strict regulation, accompanied by an efficient and timely enforcement, will also make a difference.
Investor grievances is an area which is handled by multiple tiers. The first level is the adviser/seller/agent, then the product manufacturer and then the Regulatory authority concerned. And finally, there is legal recourse. FPSB too has a role to play in as much as it must ensure high professional standards amongst financial planners.
What is your view on loads and their role in the distribution of financial products?
Entry and exit loads are not in the interest of investors as they inhibit choice and competition. All fees and charges should be clearly indicated before the product is sold and not included in the product price.