Interview. ‘Globally, mutual fund costs are heading lower’

The financial distribution industry is in churn with tighter regulations and the advent of robo advisors. In an email interview, Sanjay Sachdev, the Global Chairperson of the Financial Planning Standards Board (also Chairman of Zyfin Holdings), shares his views on the outlook for financial planners in India.

What should a retail investor look for in his financial planner? 

Seven characteristics play an important role in financial planner selection: honesty and integrity, understanding my needs and goals, placing my interests first, providing me with relevant, timely information using plain language instead of financial jargon, helping me to keep goals on track and helping to create actionable plans. Of course, there may be other factors too beyond these, such as fee structures, execution strategies and product innovation.

Are robo-advisories posing a threat to human financial planners? How are financial planners equipping themselves? 

Automated advice tools like robo-advisors should be seen as a complement to, but not a replacement for, a competent financial planner. While automation will enable investors to access financial advice in a faster, easier and non-time consuming way, speed isn’t always a plus when it comes to financial decision-making. So, the current crop of robo-advisors will themselves undergo a metamorphosis to more wholesome offerings. We could consider the current robo-advisors as Version 1.0 and expect a lot more of changes in the format.

What are the top investor protection issues being dealt with by the Financial Planning Standards Board globally? 

In a recent global study by FPSB, the top findings demonstrate that “trustworthiness” is very important while choosing a financial professional and is higher than any other consideration. Yet, two out of three investors do not know how to translate this into an actionable plan and rely on family and friends for advice or use websites for financial information. This may resonate with you being in India, but this study was actually done across 19 countries with 19,000 plus investors. 

FPSB has a mission to bridge this by promoting global standards in financial planning.

There is now heated debate in India on mis-selling of financial products by banks and other intermediaries. How are global regulators dealing with this? 

Mis-selling of financial products, as was highlighted by Raghuram Rajan too recently, is not acceptable. He has categorically said that banks should take this as a warning and build adequate safeguards to ensure that customer interest is protected. Unfortunately in India, distribution of third-party products has just been seen as a revenue generation exercise by most banks. Globally, mis-selling is tackled by ensuring higher levels of education for distributors and a change in focus from “Caveat emptor” to “Caveat venditor” (seller beware). In addition, the regulators need to ensure that the advisory business is well-distributed across different channels, with multiple pools of talent — especially the IFA (Independent Financial Advisor) community.

SEBI is keen to move distributors to an advisory fee model but the market doesn’t seem ready for this. Has this worked abroad? 

The need of the hour is to have a defined roadmap for this shift. We believe the regulator should communicate effectively with the advisory and distribution community. It should, through consensus, release a detailed paper on the changes that it envisions, how it will benefit stakeholders and invite industry participants to give their feedback and be a part of this change. Imposing changes on a piecemeal basis leads to a lack of understanding and may cause disruption that may not be healthy. Globally, the shift to advisory from a commission-based model, is in different stages and one can learn from various countries like the UK and Canada, among others. But in the end India has to evolve its own model for this transition. 

How do mutual fund costs and commissions in India compare with global peers? 

Mutual fund cost structures and fees are clearly heading lower globally. This has been driven by more efficient use of technology, higher assets and structures, such as ETFs, which are putting competitive pressure on mutual funds to lower their costs.  It is very important to note that globally, it is competition that is driving the costs lower and not regulation.

In India, the regulator has evolved a mechanism with good intent of spreading the use of mutual funds in smaller cities. But this has also allowed a substantial increase in cost structures in mutual funds — B15 costs are borne by existing investors, service tax is outside the expense structures, among other factors.

Currently, India ranks amongst the top 10 countries in the world as far as both direct and indirect mutual fund expenses are concerned. It would be beneficial from an investor standpoint if market competition drives this subject, rather than regulation.