Competent financial planners – the way towards professional acceptance

Today I would like to take some time to share some insight on our financial planning industry in Malaysia. For TRUE financial planners who have been in the industry for some time like myself, you would be aware that there are still many challenges that is limiting the growth of the industry.

It was about 7 years ago when the first license (Securities Industrial Act, commonly known as SIA) was introduced to regulate financial planning by Securities Commissions of Malaysia (which was later converted to Capital Market Service License, CMSL) and subsequently followed by the Financial Advisors (FA) license by Bank Negara Malaysia in 2006. Taking into consideration the number of years spent to liberalize this industry, we are still far behind and not growing to the desired level compared to our neighboring countries such as Singapore and Hong Kong.

The main reason is due to unclear definitions used by agents and bankers which confuse the public. From our point of view, we are seeing different standards being applied to agents, bankers and financial planners in this industry.

Therefore, I would like to share an article by Mr. Bose Dasan, an experienced licensed practitioner and a board member of the Financial Planning Association of Malaysia (FPAM), which I find that he have put a clear explanation on the current outlook of our industry.

I urge all to take a good read at this article below and this will also be available on FPAM’s 4E journal magazine......

Article by: KP BOSE DASAN CFP

Competent financial planners – the way towards professional acceptance

Introduction

We live in exciting times but it is getting every bit challenging. The profession of financial planning is trying to fit in, into various scenarios in the financial services environment. Financial services have always been there but the traditional approaches are changing by the minute. The problem arises when individuals and institutions try to hold on to their old ways and turfs and try very hard to thwart the progress of new ideas and processes. It will be difficult to present an organized, methodical, and empirical analysis of the situation especially since it is a very challenging task and secondly I must confess, I do not possess the intellectual might to present such a comprehensive analysis.

Management gurus will try to find a chart or diagram like a triangle or circle to present their approach and say this is the situation and this is the way out. I have no such tool, but financial planners can always start with the client.

What does the client want?

He perhaps wants to know, “are you the right person to talk to about his personal finances.” Let us say we successfully crossed that hurdle and the Professional CFP certification had helped. He was curious as to whether there was a license involved to practice financial planning. Bang! We are thrown into some murky waters. The Securities Commission has through its 2007 Capital Markets Services Act made financial planning a regulated, licensed activity. Thus I had to show him my CMS Representative License from the Securities Commission. As a CMSRL representative I had to also let him know my principal company through which I am licensed.

He was assured that I was not just an agent selling insurances or unit trusts. The client was happy there was a differentiation. He now has the hope and expectation that I can deliver a deeper and more meaningful or perhaps comprehensive solution. I quickly had to ask him if he was just looking to buy insurance or unit trusts. He said perhaps but I want my situation analyzed first and want to know what is appropriate for me. This is the first match between the planner and the client.

Clients are generally aware that they need insurance or that they would like to put some money into a good performing unit trust. Many may not be looking for a comprehensive financial planner. But this client wanted his financial position analyzed first and also wanted to know what was the most appropriate products for him to achieve some of his goals. He was also hoping that I could advice him on better ways to manage his personal finance and to find ways to improve his cash flow. He also slipped in the question if I was an independent financial planner with choices of financial products available. I gasped as to how to answer him. Yes as an independent financial planning firm my company had a variety of products from various vendors and manufacturers to choose from. It even has some prominent market players in insurance and investments but not all of them are represented. But I assured him that we had a fairly large range of products to choose from. My honesty appealed to him.

An issue here will be: are agents correctly distinguished from licensed financial planners. All agents sit for an exam to pre-qualify them to handle insurance or investment products. That is the depth of their academic requirement but it must be said in all honesty that the financial institutions have good training programs and have a system of nurturing agents through their multi-level agency supervision. Some institutions equip their agents with materials and software to help them present their products in the best light to their clients. Therefore, tens of thousands of agents are out there under the supervision of financial institutions handling their proprietary products. They interest their clients in a variety of ways but principally appealing to their need to insure or invest for some general goal or objective. How different is this approach to that of a financial planner. To make matters even more serious there are only few hundreds of licensed financial planners as compared to tens of thousands of agents, to cover the marketplace.

In this context it would be good to look at the definition under the CMSA 2007 as regards financial planning. As per CMSA 2007, Schedule 2, Part 2: “financial planning” means analyzing the financial circumstances of another person and providing a plan to meet that other person’s financial needs and objectives, including any investment plan in securities, whether or not a fee is charged in relation thereto.”

This definition implies that to analyze the financial circumstances of another person and to come up with a plan you need an SC license. It does not matter if you charge a fee or not. Therefore a clear distinction between a financial planner and an agent is that the financial planner makes it a point to analyze the financial circumstances of a client and comes up with a plan;, written or otherwise to help client achieve his financial need or objective. An agent can be assumed to be interested in representing his company’s product and perhaps go straight into the product presentation without analyzing his financial circumstances. It can be assumed that the product meets a general need like risk or investment and there is no attempt to provide a plan. This is where it hits a snag. Good agents to do a good job want to analyze client circumstances and want to offer a plan of investment albeit with their company’s proprietary products. Are these agents then in the CMSA territory? Such is the confusion in the marketplace. It is perhaps good that SC has not hauled up anybody for violating the CMSA provisions, which I believe it can if it wants to truly enforce this definition. The penalty for violating this provision is RM five million or five years or both.

That being the scenario you can now understand my humble apology that I do not have the intellectual might to decipher what ails in our current legal situation and what can be done to simplify things. To make matters more interesting there are many agents who have the professional certification, CFP and who are still tied to a particular company. Then there are those who are qualified CFPs who are just keen to promote products without analyzing the financial circumstances of the client and coming out with a written plan. There are many CFP qualified relationship managers who work for banks and provide private banking services under the auspices of the bank and perhaps outside the ambit of the CMSA. Therefore there are many things that need to be ironed out before we can see a clear passage for financial planners.

To add a spanner to the works the insurance fraternity have coined the professional term “financial adviser” as their own and now you need a license to call yourself a financial adviser.

“Financial advisory business” means any or all of the following services:

a) analyzing the financial planning needs of a person relating to insurance products

b) recommending the appropriate insurance products

c) sourcing insurance products from a licensed insurer

d) arranging of contracts in respect of insurance products

e) other financial services as prescribed by the Central Bank.

You can now imagine the plight of a practitioner. To handle multiple insurance products you need this financial adviser license. Fortunately both regulatory agencies have made things easier by coordinating the requirements for both licenses. However the fact still remains that you need two licenses and compliance with two regulatory agencies to practice financial planning. To me this is a magnificent example of “Malaysia Boleh”.

A social economist might be interested to find out what is going on in the Malaysian financial services environment given this dichotomy between insurance and investment and the attempt to license the less than a thousand financial planners but to allow the freedom to the tens of thousands of agents to ply their trade. What is the big picture and what is the goal of the regulators. I suppose financial institutions do wield some clout. We may have to let things evolve or decay as no one has a clue as to where the law and practice of financial planning is going and what the final outcome is going to be.

The new initiatives by the Economic Planning Unit under the leadership of the prime minister have drawn plans to build wealth management as one of the key areas for the new economic transformation program. Who will promote wealth management and its human capital development? We can’t even come to terms with whether a wealth manager is free of any restriction from being licensed as a financial planner or financial adviser. Do wealth managers need a license?

Of course the client is not interested in the trail of discussion that I have taken the reader through. He wants a good job done for him. He needs to be impressed by what the planner can do for him. He wants the assurance that all or any product recommended will do its stated job and help him achieve his objectives. He wants the planner to monitor the performance of his strategies and see that the client is on track to achieving his goals.

Therefore there is a public face to all the things being discussed here. The public do not want to be confused. They can with some certainty identify a doctor or a lawyer but he needs to be sure about his financial planner or adviser who is going to handle his personal finance and add value to his wealth. Perhaps it is worth noting that doctors and lawyers go through a period of post qualification training called internship or chambering. The financial planning profession does not have this structure. Perhaps this is an opportune time to thrash out the bigger picture and take the industry firmly forward towards 2020 to meet the government’s economic transformation initiative and achieve high income and developed country status.

While the laws are being straightened out the licensed financial planners can start the ball rolling by improving their competency level. By achieving higher competency he can win the client’s trust and patronage. His efficacy and efficiency will spiral a word of mouth promotional blitz and in the future it can be assumed that most affluent clients will only want to talk to qualified and licensed financial planners.

In this regard I urge all planners and advisers to read the document prepared by the Financial Planning Standards Board as regards the accepted competency levels and the practical knowledge and skill sets expected of a CFP professional. Passing the exams is only one of the four pillars. Experience, ethics and continuing education are important pre-requisites to remain relevant to the financial planning industry. Let us rise to the challenge of bringing economic transformation through expert wealth management by CFP professionals.