Bubble bursts for robinhood traders; financial planning is trending now: Rajesh Krishnamoorthy

The market regulator Sebi doesn’t want registered investment advisors (RIAs) to sell products or those who sell products to give advice. While there are thousands of mutual fund distributors, the number of RIAs is limited – only about 1,300. Speaking to Money9, Rajesh Krishnamoorthy, Country Head, India Liaison Office, Financial Planning Standards Board points out that even though the number of financial advisors is low, this is how everything begins – Bit by bit, drop by drop! Edited excerpts:

Is India ready to pay for advice? Are you seeing it happening?

It would be logical to conclude that when any profession is regulated in a country, the genesis of such regulation traces back to the relevance, acceptance and impact the profession can have on the common man. We have the SEBI Investment Advisor Regulations since 2013. Another way to look at the readiness is to observe the players in the ecosystem. We have platforms providing comprehensive technology, compliance and operational support to regulated investment advisors. We have many financial planning and risk profiling tools being provided via cutting edge technology on standalone basis. We also have a recent update from SEBI granting approval to BSE Administration and Supervision Ltd (BASL) for carrying out administration and supervision activities of investment advisers. Within the profession, you are seeing evolution too.

Look at the different models in financial planning and investment advice being offered by regulated entities – you have fee-based service providers (they have client level segregation on who engages them on fee-based investment advisory activity and who others engage them purely as consumers of financial products where no investment advice is provided) and you also have in India fee-only advisors. To me, the emergence of fee only advisors in any country is evidence that the profession has arrived! Maybe the numbers are very small, but isn’t that how everything begins? Bit by bit, drop by drop!

In India bank relationship managers, insurance agents or CAs are by default investment advisors for most people. How to spread awareness around correct and credible advice?

This links up to my previous answer. There is an old saying – habits take long to die! Even if you take the ‘h’ from it, a bit remains. You take ‘a’ from it, bit remains, and you take ‘b’ from it, it remains! Sometimes, history needs to be invoked to contextualise an answer to an otherwise simple looking question! 1770 is when we had Bank of Hindustan, 1921 was Imperial Bank of India which went on to become State Bank of India in 1955. We are talking about generations that have interacted with banking services and a legacy that has been passed on. Our Parliament enacted The Chartered Accountants Act in 1949. Manusmrithi, Dharmasastra and Arthasastra have references to Insurance! After we saw Oriental Life Insurance Company being set up in then Calcutta (now Kolkata) in 1818 we have been witness to our insurance laws getting refined between 1914 and 1938 culminating with the Insurance Act, 1938.

Life Insurance Corporation was established in 1956. Talk about habits, we now can understand it in the perspective of time! So, I think it is a bit unfair to compare 2013 to any of the years of the past and conclude anything. Having said that, we have a very important role to play in spreading awareness. Today, electronic media has a huge reach. We have over 62 crore internet users today in India and is expected to go to 90 crore in 2025. So, like in all evolution, I believe that this is a big leveler and awareness of doing the right thing with your money, having a financial plan for the present and the future will grow exponentially in the coming decade. History is repeating with bubbles bursting and scams breaking out – see the plight of “robinhood” investors in India and those many who brag about their cryptocurrency but end up buying some sham coins on some unregulated portals! Well, that is a hard way to learn, but nevertheless, a lesson learnt! The more I speak to people who have been subject to some such setback in life, the more I get convinced that financial planning will get deep rooted in our society. It is just a matter of time!

What are the regulations around fee structure of RIAs?

As per the extant regulations on RIAs, SEBI has regulations pertaining to the fee structure of RIAs. (Regulation 15 A). The guiding words there are that such fees should be fair and reasonable to the client. There are two existing modes as defined in the guidelines by SEBI to RIAs.

Assets under Advice (AUA) Mode and Fixed fee Mode. The maximum fees are capped at 2.5 per cent per annum on the AUA mode and Rs. 1,25,000 per annum per client – both further subject to many conditions laid within. Hence, the basis of an investment advisor charging a client could be within these two larger modes.

For example, a fee only advisor could state a per hour fee for consultation and further review, a specific fee for writing a financial plan which could be a one-time fee so long as the total of all such fees charged to client in any given year is within the fixed fee mode cap prescribed by SEBI.

I would urge all clients to go through the agreement and fees section before they are onboard with any intermediary, including RIAs. This just saves time for all parties as there cannot be any ambiguity on what the fees are and how is such fee being calculated.

What about low-salaried people who cannot afford RIA’s fees?

Let us look at basic economics. There is always a demand and supply equation that often determines price points. On one side, we can say supply of professional financial planners is not commensurate to the size of India, and in the same breath, we can also say supply of financial planning seekers (i.e., public) is still in a very nascent stage. Flip the same information from a demand point of view, less people demanding such professional services and those who do demand, have less supply of such service providers. So, I think affordability is a very relative term. I would also believe that as we evolve regulations pertaining to financial planning, the regulators would also look at how can “advice gap” be minimised in the country. Everyone has to contribute to these conversations, and I see the question on affordability getting answered – together!

How to spread financial literacy at the grassroot level?

Financial literacy must start with integrating basics of personal finance in our education system. Children should grow up knowing what money is, what are the dos and don’ts when it comes to money matters and foundations of personal finance. Prosperity shouldn’t be equated to having a lot of money. Neither of them is a prerequisite to learning, nor are they a prerequisite to undertaking personal financial planning. In fact, I argue that proper financial planning helps one walk the path of prosperity in the long run!