As confused as anyone else

Recommending a financial planner requires a transparent framework. Sadly, we don’t have one.

Readers who write me mails have a common question: Can you help us with our personal finances, or can you recommend an advisor? I do not offer advisory services myself, so the only choice is to refer them to another advisor. Having worked in the financial services industry, I can claim to have met several financial advisors who work independently or for banks and broking houses. Does that leave me with the ability to reel out a list of advisors to my readers? Do I have an objective framework on the basis of which I can filter out the best? Sadly, no. We need a transparent and objective framework for choosing an advisor. What can be done to enable this?

First, advisors sell products that are regulated by multiple regulators — Sebi, Irda and Pfrda. While these bodies have elaborate regulations for producers of financial products in their jurisdiction, they only prescribe a gate-keeping certification exam for advisors. These exams are simple and basic and are not a measure of the advisor’s professional competence. Investors tend to trust their chartered accountants with their money, knowing they have completed a tougher, if not completely relevant qualification. The majority in the financial advisory business have not studied finance or capital markets formally and thoroughly. What is needed is a relevant professional qualification.

Second, there is no comprehensive regulatory or disclosure requirement for advisors. Several advisory businesses are set up as sole proprietorships, and even when they are set up as divisions of banks, there is no reporting or disclosure requirement on their performance, financials, or track record. Since they recommend products without taking the funds of the investor on their books, they do not have the standards for keeping data or disclosing how their recommendations worked for their clients. Client confidentiality agreements preclude them from disclosing the advice and the outcomes.

Advisors populate most of the personal finance columns of newspapers, as a strategy to build credibility for their approach and showcase their knowledge. For the majority, that is not in the press or television, establishing equity based on their track record is tough. In other countries, the issue is addressed through industry associations.

Third, wealth management as a business is relatively new and in the environment where market share is still being built, sharp practices abound. Mis-selling of products to customers, based on the commission revenue it earns from the customer, rather than the relevance of the product to the customer, is an example. While we should denounce this practice, it is important to see that development and regulation of market practices are twin responsibilities. Allowing wealth advisory businesses to grow without any regulatory control is harmful. Equally harmful are regulatory controls that curb business.

Fourth, investor expectations from advisors are not very well defined. The number seeking advice on goal-based investing has increased, as compared to those who seek product-related tips. One still sees investor education campaigns, television shows and investor queries converging towards what to buy or sell. There is clearly a distance to travel before we are able to choose and use wealth advisors better.

The writer is managing director, Centre for Investment Education and Learning.

Views expressed are her own