Financial Literacy
Among Financial Advisers needs to improve: Cafe
Mutual, EY..!
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
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
re imagined, 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.
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| 5% of Certified Financial Planners In Chennai |
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 India
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 130 Crore.
About 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,
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