Open letter to SEBI re investment advice…as a consumer

by Hansi Mehrotra

12th July 2017

Firstly, I want to commend you on the direction of the reforms in the Indian asset/wealth management industry over the past few years. I have followed these with great interest as an industry professional.

I note you are proposing further changes, and have asked for comments on the proposed amendments to the Investment Adviser Regulations. I have applauded the idea behind separating the qualified and fee-earning investment advisers from the commission-earning mutual fund distributors (MFDs). I can see you are encouraging the yet-evolving profession from the business. While I will contribute as a professional through the right channels, I also want to share my experience as a consumer.

Here’s why I still struggle to manage my personal finances in India –

I expect my investment adviser to have relevant upfront and ongoing education

I expect my ‘investment adviser’ to be, well, an ‘investment’ professional, who understands economics, finance, capital markets, fundamental and technical analysis, portfolio construction etc. I also expect them to know about more general non-investment issues such as behavioural finance (which is more psychology), wealth planning, tax etc. In a way, I want them to be a generalist with access to specialists.

So it doesn’t fill me with confidence when I meet investment advisers with non-relevant qualifications or experience. And I am amazed that they don’t even believe in continuing professional development, let alone actually doing it.

I would have expected a staggered structure like in medicine – a MBBS to become a GP and then advanced studies to become specialists. There could be a minimum degree for financial planning (such as the Certified Financial Planner CFP or Certified Private Wealth Adviser CWM program of IMCA), and then add specializations, for investments (such as the CFA program) and wealth protection/planning (such as STEP programs). Ideally, there should be local qualifications with some global standards and mandatory continuing professional development programs.

Of course, then we should re-name the advisers to be ‘financial advisers’ rather than ‘investment advisers.’ Whatever they are called, they need to be qualified to become trusted advisers.

I would like a one-stop solution with ongoing service

Once I have chosen an adviser I trust, I want to be able to rely on their advice and delegate my affairs to him or her. I want them to execute on the advice they have given (and I have accepted and paid for) by investing in direct funds (ie without commissions built into the fund costs). I want them to give me ongoing reports on my portfolio, as they relate to my goals, and contact me with alerts when I have to do something. In short, I want a one-stop solution with ongoing service.

Why do I have to deal with a separately identifiable division, or a subsidiary as you’re now proposing? Or worse, if my trusted adviser is not corporate enough to have a subsidiary, why do I have to deal with another company just for the execution and then make it hard for my adviser to provide me ongoing reporting?

I want good quality and independent research on funds

It’s great that you recognize that star ratings and other such ranking systems based on past performance can be misleading, hence are banned in advertising. I am not sure why media platforms are exempt – I would have thought a media house would have fewer qualified investment professionals than a focused research provider to be able to come up and maintain a ranking/research system.

Anyhow, I expect my adviser to conduct research and subscribe to an external provider for good quality independent research. The problem is that it’s hard to find. I have some suggestions on how advisers could come up with their recommendations using building blocks.

In the meantime, I am convinced I can’t rely on such rankings without disclosure on methodology and performance. I don’t even understand how a ranking based on past performance can be predictive when every disclaimer reminds me that past performance isn’t.

The bottom line is as a retail investor, I don’t have enough information to pick funds without the help of an adviser who conducts or subscribes to research. At least I know what I don’t know (because of my finance background). I hate to think what my non-finance friends will do when bombarded with offers for the ‘best mutual funds’ from e-commerce platforms. What I get in the name of investor education is product brochures. So while you’re at it, you may want to look at the investor education regulations.

In conclusion, I urge you to focus as much on the profession as the incentive structures which, I agree, are powerful drivers of behaviour. I also encourage you to look at the role of independent research in this industry. Lastly, I believe investor education can be much more effective than it is currently.

I look forward to investing more.