Noel Maye, CEO, Financial Planning Standards Board, USA, talks to Tanvi Varma about the intricacies of financial planning in India and current standards of the advisory industry.
What are your views on the current state of awareness on financial planning in India? Do you see a rise in awareness levels with a rise in the wealth quotient?
Awareness of financial planning in India is low, but this is pretty consistent with the state of awareness in a lot of other countries where we have our programs. Consumers do not understand what financial planning is and, due to which, they don't value it.
The key element to a financial planning certification is financial literacy, which makes it important to improve overall literacy levels. As wealth increases it tends to change the mindset. When consumers are in a state of subsistence, wherein they live on a day-to-day basis, it is hard to plan your finances. As wealth increases you have something you need to protect or multiply.
While awareness levels are currently low, we are seeing an improvement globally, including in India. Consumers are living longer and in retirement than as part of the work force. Regulators and governments are pulling away from guaranteed pensions and employers are pulling away from offering lifetime employment. Consumers now need to take on the responsibility (of creating wealth).
Do you think that the need for financial planning in India is different compared with other countries, especially the developed world?
Culturally, in India, the structure of a family is usually strong and extended. This means it is not uncommon for Indians to be involved in taking care of their parents, grandparents, their children's education or marriage and so on.
To accomplish this, one needs to have an extended financial plan. This adds a measure of complexity and needs to be factored in by a financial planner, unlike in western culture or anywhere else where the planner only deals with a particular client's individual issues.
Typically, problems and approaches are common everywhere and markets tend to evolve. Markets that were focused on transaction or product selling, where individuals went to different people for different needs, are now seeing a shift to wanting a one-stop solution provider, someone who can plan your whole life and give you a solution in its entirety. Increased responsibility and complexity leads to this change.
"Consumers do not understand what financial planning is and, hence, they do not value it."
Things are better when you have professional help. In 2008, people lost a lot of their wealth and realised they did not want to undertake this journey (of planning their finances) on their own. During this period, certified financial planners (CFPs) gave feedback that their clients stayed the course that had planned for them.
Education and trust helps in developing this. Investors understand that volatility will come and that risk exists but they still want to stay invested, now more than ever. India was known to be a saving country.
Earlier investors wanted tangibility, to be able to invest into things they could see and so they invested in gold, real estate etc. Now, there has been a shift in mindset to investing in stocks, bonds, mutual funds and so on.Do you feel there is a need to strengthen long-term financial security of in India?
Yes, it is very important to create retirement funds. Because India does not have social security in place yet
, you are in a better position to understand financial planning (for retirement).
Europe has a very solid social security system in place and yet, with governments going into debt, what has been telegraphed to consumers is that they may not be able to fulfil all obligations. The US has also indicated that while social security is there and the government will pay a small part of retirement income, they might need something more for financial security.
Even with such systems in place, these have not been designed to cover all your needs or designed to protect you from impoverishment. People want to maintain a lifestyle during retirement - commensurate or better than what they have had during their working life. Whatever the social security structure, it is never enough; you must take care of yourself.
If we look at the Australian model they have superannuation, while in America it is called the 401K. Individuals, while they are earning steadily, contribute to their retirement with pre-tax dollars and there is a matching investment made by their employers. The notion of letting people save pre tax for retirement is what motivates them.
In the US and Australia, it is money that was never part of their salary that is being put into the retirement fund and so they won't miss it (while they are working). Given the opportunity to save pre tax and with access to financial advice, one can improve one's financial well being.Since the primary role of the board is to raise standards of financial planning, how important do you think is the need for the board to work in tandem with financial regulators in India?
There already is a relationship between FPSB and regulators. The whole of United Kingdom has one regulator, the Financial Services Authority, while India has five or six dominant regulators and the United States has about 200, which includes state securities regulators, state insurance regulators and federal regulators.
The regulator's function is straightforward, to set a barrier that people must pass to get into the financial advisory space, but it is set sufficiently low so that you don't deny people livelihood.
"As wealth increases you (investors) have something you need to protect or multiply."
FPSB sets professional standards for those who wish to practice at a higher level with more experience and qualification. Regulators are here to see that people follow the norms. We have seen a shift in approach by regulators globally. In the past it used to be a rule-based approach and then there was a shift to a principles-based approach, where they will give you general guidance but trust you to get it right.
However, post the global financial crisis, the pendulum has swung. Regulators are back with consumer protection-whether consumers are protected, how they are protected, are advisors competent and assessed, is the remuneration adequately disclosed etc. So while we create standards for profession, regulators create barriers to entry and other norms.Are certification standards different in different parts of the world?
All our CFP certifications have the same standards and frameworks. FPSB India, for instance, takes global frameworks and localises it so that it covers Indian products, laws and regulations and delivers financial planning within that context. So, we have global standards but local programmes.Why do you think there is a greater need for financial planning for women, who are increasingly entering the workforce?
Yes, (reports show that) women live longer than men and so statistically she will need retirement income for a longer time. This makes financial planning for retirement more important for women. Also, women usually have to leave the workforce to have children, which means they are bound to miss promotion opportunities. Hence, at the same age, they're earning comparatively lower than men. This means they are at a different position and have different pension benefits on retirement.Do you feel that entry norms to act as independent financial advisors or brokers should be strengthened to reduce mis-selling?
We have an exam for entry, which tests competency and also a registration process. Several of our affiliates have been approached by governments to manage the examination process and registration for the broad advisory community.
We need to know who is in the field, whether they are qualified and if there is someone who can hold them accountable. We are one of the few organisations the CFP certification can be taken away.There is a lot of contention on the appropriate pricing structure for providing financial planning services. What is your opinion?
People have always paid for financial advice and products, they just didn't know it. Commissions and charges were built in. People will not pay for something they don't value and they will always pay for value. If consumers believe that the financial planner's advice will be useful in securing their finances, why wouldn't they pay for it?
It is like going to a doctor for professional advice, you go to him because he is qualified to practice medicine and can give you a diagnosis that addresses your ailment. You are willing to pay for this advice as you see value in it.
Once investors start seeing financial planning as a professional engagement and an advisor as someone offering a service of value, they will pay. Of course, pricing will differ based on the advisor's experience, qualification, the levels of service and so on.