FECIF - The European Federation of Financial Advisers and Financial Intermediaries
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Editorial - October 2017

Dhruv MehtaDhruv Mehta,
Chairman of the FOUNDATION OF INDEPENDENT FINANCIAL ADVISORS

Evolution and Regulatory Challenges – Lessons from India

The Foundation of Independent Financial Advisors (FIFA) is a body representing Advisors and Distributors of Mutual Funds in India, commonly known as Independent Financial Advisors (IFAs).

During my recent meeting with FECIF I realised the common vision that both associations have for their members, investors, consumers and the industry. Financial intermediation is facing a regulatory backlash on a global scale, which is generally unwarranted.

Excessive and unwarranted regulatory backlash

Post the 2008 global financial meltdown, regulators across the world have been pushing forward a number of regulatory changes aimed at eliminating conflict of interest, providing greater transparency and enhanced disclosures. Unfortunately, what has been lost sight off is that the problems that led to that meltdown were from different segments of the financial markets; namely the housing/mortgage market, alternative investments and excessive leverage by the large investment banks and financial institutions - not the advisory sector or mutual fund industry.

Even in India, the mutual fund industry emerged relatively unscathed during the global economic crisis and was able to weather the effects of the global meltdown and fulfill all of its obligations to its customers. Despite having  no material evidence of any wrong doing by our industry or miss-selling by intermediaries, post 2008, the Indian regulator (Securities Exchange Board of India – SEBI) also pushed for a number of significant regulatory changes  with a view to micro regulation of financial market intermediaries.

Mistaken belief that fee based advice is the only way ahead

According to SEBI and some other global regulators the client engaging with the advisor is in the best position to properly assess the value of that advisor’s services and pay him accordingly. They also believe that financial intermediaries remunerated by commissions which are embedded in the cost of the products do not provide the right advice because of a conflict of interest. Regulators have an apprehension that the presence of a commission-based fee structure has led financial institutions and intermediaries to focus on maximizing commission incomes at the expense of the investor. Globally regulators have formed an opinion that there is a conflict of interest when an advisor receives commission from the product provider rather than receiving a fee directly from the investor and this has to be eliminated rather than managed.

Thus SEBI and a few other global regulators are considering a ban on commissions and are working towards only allowing a fee based service.

September, 2016 Consultation Paper

In September 2016 SEBI published a consultative paper proposing migration to a fee based system from a commission based one by banning distributors from giving advice to investors. There was a clear objective to unbundle mutual fund products, and migrate from an embedded, ‘commission-based’ distribution scheme to a non-embedded, ‘fee-based’ intermediation. The paper proposed a time period of 3 years for the intermediaries to compulsory migrate from being commission based advisors/distributors to become fee based advisors.

FIFA was at the forefront in engaging with all stakeholders and making representation on this subject.

Our representations highlighted the likely negative outcomes on a total ban on commission based distribution:

  • Advice gap - retail investors will be orphaned.
  • 0.75% p.a. increase in the total cost to investors.
  • Dramatic fall in the number of intermediaries

Increase in cost to investors

This is evident from FIFA’s study of expense ratios of 25 countries. The findings of this study have previously been presented to SEBI and highlight the fact that the average expense ratios in countries with a fee model is 2.77% whereas it is 2.02% where commission models still exist. Thus an increase in cost to the investor of 0.75%!

Similar plans to herd and regulate advisors under a single regulatory regime in the UK, the Netherlands, and Australia have witnessed a contraction in the distribution channel and a migration of remaining advisors/ distributors towards the wealthier clients.

International Advisory Board

SEBI has an International Advisory Board (IAB) whose role is to guide SEBI and, in doing so, bring in the global experiences and rising developments and challenges. In the meeting of the IAB in January 2017, it recommended that commission-based as well as a fee-based approach to investment advisory should co-exist for the time being. The transition from commission to a fee based approach has to be gradual and after a thorough impact analysis. It urged SEBI to study the impact of migration to fee-based advisory models under RDR (Retail Distribution Review) in the UK, FOFA (Future of Financial Advice) in Australia, and robo-advisory models.

The compulsory migration of commission based advisors/distributors to become fee based advisors was then put on hold.

New proposals

However, in July 2017 SEBI came out with fresh proposals to separate the advice and sales/execution function, with fee based advisors entitled to give advice and commission based distributors only able to sell and execute but not give advice.

Proposed regulations ignore reality

These current and proposed regulations ignore the ground realities and the way the advice profession has been structured globally and in India. The investment advisory profession is predominantly a comprehensive service of advice, sales and execution. Execution would include purchase of the appropriate products. It also requires an ongoing service and hand holding. Currently In India, and across many countries, most intermediaries are remunerated through embedded commissions which are paid out of the cost that investor incurs on his investment rather than paying fees separately.

In India individual intermediaries are known as Independent Financial Advisor (IFA) and they are independent of any one product provider. It is essential to understand the dual role that an IFA has been performing. A role which includes an investment process of advice, sales, and service.  For his services he is compensated by the product provider from the cost that is charged to the investor.

In India, since the introduction of the RIA regulations, only 730 entities have registered, clearly indicating the lack of adoption of the fee-only model. Today there are some 86,000 entities registered with AMFI providing advisory services, a majority of them (more than 80000) categorised as IFAs.

Reports indicate that nearly 80 percent of IFAs sell other financial products in addition to mutual funds - for example, life insurance, small savings, general insurance. Most IFAs typically sell the mutual funds of five or ten asset management companies (AMCs).

Financial intermediaries also include the national and regional distributors who typically have a more organized and formal setup compared to IFAs with many of them having their own branch network, sales force, and online channel. In addition, many of them aggregate some of the sub-brokers' business.

It would seem that the small number of registrations of Registered Investment Advisors is leading to measures by the regulator to force people to shift. Our concern is that the shift will be negative for the industry at large.

It is necessary that regulators the world over must evaluate the cost they are imposing on investors on account of their perception and fear of miss-selling because of conflicts of interest. What needs to be acknowledged first and foremost is that the financial intermediary enables the investor to achieve his financial goals. The focus has to shift on achieving investor outcomes and away from the mode of intermediary compensation.

Suggested Framework

To truly empower the investor they must be given the choice to invest on their own or through a financial intermediary. If they opt for the latter they then need to be given the option of how they remunerate the advisor, whether by way of fees or embedded commission.

Similarly advisors must be given the freedom to offer the investor a fee based or an embedded cost based service.

The regulator should not be making these choices or eliminating any of these options. Reducing the available choices to the consumer is never in their interest in the long run. The free market system will allow the most efficient model to grow and prosper.

 

 

 

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Editorial - January 2017

Daniel GuéguenDaniel Guéguen
Head of Strategy and Lobbying at PACT European Affairs

A journey through the EU Institutions

Every year before the start of the summer break, I treat myself to a journey through the EU Institutions. I say ‘treat’ because it is a real pleasure for me to speak freely and in full confidence with elected politicians, senior civil servants, head lobbyists and representatives from...

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Editorial - August 2017

Jirí ŠindelárJiří Šindelář
Member of FECIF board of directors

How Vox Populi in Europe is (sometimes) being portrayed

Two weeks ago, my home city of Prague hosted an important event: the Joint ESAs’ Consumer Protection Day. This is an event that forms an important part of the regulation agenda and according to its organisers should “discuss issues related to consumer...

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Editorial - July 2017

Vania FranceschelliVania Franceschelli
FECIF Board Member & ANASF Executive Committee Member

Product governance requirements will lead to greater quality of advice

Product governance requirements represent one of the most outstanding innovations of MiFID II, aiming at ensuring that firms which manufacture and distribute financial instruments act in the clients’ best interests during all the stages...

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Editorial - May 2017

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

The value of advice – and the cost of being unadvised

There have been numerous studies over the years that have shown the value of good quality financial advice – not least, the fact that clients that receive it are, in general, significantly better off in retirement and much more financially protected during their life journey towards that point...

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Editorial - March 2017

Vania FranceschelliVania Franceschelli
FECIF Board Member & ANASF Executive Committee Member

We need new market propositions not unnecessary bans

The final date for the transposition of MiFID II in each Member State – January 3rd 2018 – is fast approaching. Is it possible to see some initial insights into the industry, in order to foresee the impact of the Directive on business models? In particular...

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Editorial - January 2017

Daniel GuéguenDaniel Guéguen
Head of Strategy and Lobbying at PACT European Affairs

2017: action, action, action

”My right flank is destroyed, my left flank is in retreat, everything is fine – attack!” Those were the words of General Foch in the darkest moments of World War One. We are there once again. Sink or act – that is the choice we have.

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Editorial - November 2016

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Playing your Trump card

Well, for those of us surprised by the Brexit vote - and there were plenty in the City of London that is for sure – the US election creates a whole new perspective with regards to astonishment, and on a much wider spectrum. I don’t know what it says about Hillary Clinton and her campaign – well, on reflection, I probably do – but the fact that Trump won, allied to the UK’s EU...

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Editorial - September 2016

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

“The reports of my death have been greatly exaggerated”

This famous quote was a statement made by Mark Twain on hearing that he had been mistakenly announced dead. Although it is apparently a slight misquote, the meaning remains very much in line with what the great writer intended. It also came to my mind the other day when I was once again thinking about so-called “robo-advice” and...

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Editorial - July 2016

John WestwoodJohn Westwood
FEIFA Board Member and Blacktower Group Managing Director

Brexit: a disaster or something far less worrying?

The British electorate has given its verdict on the UK’s membership of the European Union in no uncertain terms but, in spite of some emotional appeals to the contrary, this is not a disaster.

It is worth remembering that on the 20th February 2016, when David Cameron announced that the EU referendum would...

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Editorial - May 2016

Rebecca MurphyRebecca Murphy
Director of Sales & Marketing at Praemium
Re-engaging the investor

Re-engaging the investor

It’s rough sailing right now for investors and savers alike! Volatile markets and low interest rates are the norm, and investors are bombarded with information about products and services without understanding how any of it relates to them...

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Editorial - March 2016

David DentonDavid Denton
Member of FECIF board of directors

You can run, but you can’t hide

The Organization of Economic Cooperation and Development’s (OECD) Common Reporting Standards (CRS) - also known as Automatic Exchange of Information - is gathering pace post FATCA. For decades, developed economies have wrestled with the notion that wealth overseas, whilst not illegal...

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Editorial - January 2016

Hans-Jürgen BretzkeHans-Jürgen Bretzke
CEO of FinanzAdmin  GmbH

Some of the myths surrounding fintech companies

“I would go so far as to say that any broker armed with an average customer base and network is better placed than a fintech company on the strength of his or her client contacts alone.”

In this guest contribution, Hans-Jürgen Bretzke, a member of ...

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Editorial - November 2015

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Pension provision - is this the real “gap”?

The “advice gap” has received considerable coverage in the personal finance pages and trade press for some time now, across the UK in particular but it is also a growing concern across Europe and beyond. I wonder, however, if the focus should really be on the “pension’s gap”...

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Editorial - September 2015

Vania FranceschelliVania Franceschelli
Member of the Board of FECIF / Member of the Executive Committee of ANASF (Head of Foreign Affairs)

In July FECIF sent its contribution to the ESMA Consultation Paper on the Draft guidelines for the assessment of staff knowledge and competence under MiFID II. This Consultation Paper is of outmost importance for all financial advisors in Europe, as it provides the basis for the definition of the qualification and...

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Editorial - July 2015

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Making regulation more effective and accountable

The month of May saw the launch of a new trade association in the UK, as highlighted in last month’s editorial. It seems to me that its aims and concerns are highly important elsewhere in the EU.

>> CONTINUE READING

Editorial - May 2015

Johannes MuschikJohannes Muschik
Chairman of FECIF, Chairman of AFPA

New Chairman takes office

Back to my desk after our Annual General Meeting where I have been elected as Chairman for the period 2015/2016.  The AGM was also an opportunity to exchange views on a number of hot topics concerning our industry...

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Editorial - March 2015

Jirí ŠindelárJiří Šindelář
Chairman of USF CR / Member of the board of FECIF

Squaring the circle, or back to roots? A view of European regulatory turmoil from the former “Eastern Bloc”

When the Velvet revolution overthrew the Czech communist government in 1989, a crucial part of the change was the transition to liberal...

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Editorial - December 2014

Graham ReidGraham Reid
Managing Director at Classic Financial Solutions CVBA

The true worth of an adviser

A few years ago one of our clients suffered a nervous breakdown.  After early retirement he had continued working as a consultant from a small office at home, from where he also managed the family finances, something in which ...

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Editorial - July 2014

David CHARLETDavid CHARLET
ANACOFI

For my first editorial as President of FECIF, I would like to thank every member of the Board, the General Assembly and the Staff.
I would also express a special thought for Daniel Nicolaes, one of the best representatives of our profession in Europe, who disappeared a few months ago.

>> CONTINUE READING

Editorial - June 2017

David CharletDavid Charlet
FECIF & ANACOFI Chairman

Europe as financial advisers see it

A long time ago, the European Union used to be a place for the production of coal and steel. Nowadays, it seems to be a global Union far more engaged than the US with our jobs and other matters. Consider: in the US no would find “passports” for...

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Editorial - April 2017

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Are you really ready for the future?

“The other day Ray was having a conversation with his 13 year old son and they ended up on a topic / issue that they needed more info on – his response was to “Google” it, his son chose to “YouTube” it. He realised at that point that they had different ways of looking for information, learning answers, and engaging with...

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Editorial - February 2017

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Transparency not commission is the real key for 2017 and beyond

A number of industry commentators keep stating that it’s now all about the end of commission on a global basis – but is it, really? We all know of the switch to fees in the UK, and also a small number of other locations around the world, but certain other jurisdictions have also been quoted as moving in that direction, only for regulators in...

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Editorial - December 2016

Paul ResnikPaul Resnik
Cofounder & Director of Finametrica

Robo 3.0

Robo advisors are, beyond any doubt, hugely disruptive to the financial advice market. But not in the way that many people expect.

Many commentators and analysts are still focused on trying to pick the ‘Uber moment’, when robos wipe out the old world by...

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Editorial - October 2016

Schroders Investment ManagementSchroders Investment Management

Over confident investors and the help they need

Investors thinking they know more than they do about investing could cause problems when it comes to their future financial planning.

Investors could be missing out on billions of Euros in investment returns by over estimating their own ability to understand...

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Editorial - August 2016

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Robo-advice financially unviable

The above was the main content of an article in a financial industry publication last month. This was based on a recent study, which found that UK robo-advisers are structured in such a way that they will lose money and “most will go bust before acquiring the sizeable assets under management needed to survive”.

Food for thought, not least for regulators – many of whom seem...

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Editorial - June 2016

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Do consumers and advisers finally have the same goals?

Over the last year or two it has struck me that the increasing complexity of regulation is not only being seen in a negative light by the financial advisory and intermediary market – there are also growing concerns being expressed by consumers and, in particular, consumer groups, that this is having a negative impact on the public at large.

>> CONTINUE READING

Editorial - April 2016

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Interesting implications for the rest of Europe and beyond?

Last month saw the publication of the results for the UK’s Financial Advice and Market Review (FAMR). Whilst this might not have had much in the way of impact elsewhere across Europe, it perhaps should have done...

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Editorial - February 2016

Jirí ŠindelárJiří Šindelář
Member of FECIF board of directors

The Brussels’ Circle of Overregulation

Even though the European Union was given a series of warnings regarding its effort to regulate anything and everything, it did not slow down. Despite proclamations about “changing the course” and “smart regulation”, from November to December...

>> CONTINUE READING

Editorial - December 2015

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Robo-advice: fact and fiction

I have lost count of the amount of articles about so-called robo-advice. It certainly is the “flavour of the month” and, if we believe all that we hear, will soon become the most important element in the delivery of financial services. I have some strong views on this….

>> CONTINUE READING

Editorial - October 2015

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Where now for commissions?

European regulators eventually “stood back from the brink” and within the agreed text of both MiFID 2 and the IDD (Insurance Distribution Directive) fell short of a complete commission ban – a ban that many thought might well happen as little as 12 months ago!...

>> CONTINUE READING

Editorial - August 2015

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

The importance of effective representation

The compromise text for the Insurance Distribution Directive (IDD) was recently finalised and it was very pleasing to see that the vast majority of the proposals put forward by FECIF in the recent consultation period have been heeded.

>> CONTINUE READING

Editorial - June 2015

Garry HeathGarry Heath
Director General Libertatem

Garry Heath announced the launch of Libertatem last month, a new trade association set up to represent all types of financial advisers based in the UK. His thoughts and plans are outlined below – they have great relevance to the rest of Europe.

Over the last decade the industry has lost sight ...

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Editorial - April 2015

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

10 reasons to use a Financial Adviser

Many people have the perception that only the very wealthy need financial advice. However, the facts are that anyone can potentially benefit from such advice...

>> CONTINUE READING

Editorial - February 2015

Garry HeathGarry Heath
Journalist, The Heath Report assured

IFAs: Support trade associations or jeopordise independence

The last month has been one of travel. Firstly a symposium to address in Toronto and then it was Brussels and the FECIF conference...

>> CONTINUE READING

Editorial - September 2014

Paul StanfieldPaul Stanfield
Chief Executive at FEIFA / FECIF Secretary General

Our immediate goals

I was very pleased to be elected as the new Secretary General of FECIF at our last Board meeting, it is very much an honour to represent a body that supports and promotes the adviser...

>> CONTINUE READING

Editorial - June 2014

Paul StanfieldPeter Brooke
Financial Planner, member and partner with the Spectrum IFA Group

Should I use a Financial Adviser to help me?

Creating a financial plan is NOT a complicated thing to do; it is an audit of where you are today, financially, and where you want to be at different stage...

>> CONTINUE READING

 

 

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