February 5, 2013
Life of Advisor = Life of Pi who had to live with Richard Parker
Suresh Sadagopan
CEO, Ladder7 Wealth Planners Pvt. Ltd.
Adaptation is an evolutionary process where an organism or species changes over time, due to what it encounters, in it’s environment. If it is a slow evolutionary process, it will not be noticed and the pain will be very less or not there at all. However, fast paced change can be unsettling. That is the reason why most don’t like change. Change involves moving from one’s comfort zone to another, which is unfamiliar and hence unsettling. But change is inevitable and is like a tidal wave… It is for us to reconcile for ourselves that we cannot fight it and rather harness it for our betterment.
Many of you might have seen The Life of Pi. Pi’s life goes topsy-turvy literally, in the middle of the ocean, his ship sinks and he finds himself in a small lifeboat. He finds a Bengal tiger ( Richard Parker ) too in the boat and he is terrified. He builds a makeshift raft to escape the tiger. But he finds that he cannot abandon the boat. He has to feed the tiger and ensure that it does not eat him; he slowly learns & trains the tiger by using some techniques which keeps the animal, in it’s corner. They learn to live with each other. Over time they surmount several challenges along the way and after 227 days, their boat washes up on the coast of Mexico.
Pi’s situation was very difficult indeed. But, he learned to live with it… with a tiger to boot!
Now, we are experiencing change in our field. Many of us have plunged into the abyss of sorrow and self-pity that we are not willing to acknowledge the inevitability of change. Whether we like it or not, the Investor Adviser regulation is a reality. It our Richard Parker! Now, how are we going to live with it? How are we going to benefit from it? Those are the questions that we need to answer.
The regulation is indeed a sea-change in the way we need to operate. In one fell swoop, we will all have to operate only on fees. The disconcerting fact is that there is not much time to adjust.
Instead of navel gazing, why don’t we dispassionately look at the regulation. Is the direction right? I would say so. It is inevitable as there seems to be a convergence of opinion across the world on this. Now, let us not start debating how unfair all this is, as all regulations are coming only in the Financial Services space. But, the 2008 problem emanated in this space and hence the regulations are also focused on this area – is it any surprise?
Will it benefit the clients?
Yes & No. This regulation sets a high bar and hence the Investment Advisor should be someone who passionately believes in a consulting practice, is committed and willing to look things in the long-term. Only for those of them, it will work. Clients will be able to get good quality advice, if they are able to find Investment Advisors.
But the number of Investment Advisors are going to be miniscule for a longtime to come, primarily due to the challenge of earning a viable income. Compliance, reporting & the attendant costs as well as the higher benchmarks for education/ experience, can also serve as a barrier.
What are the challenges for us?
- Cost of operations will go up, with registration compulsory for the Investment Advisor and their employees.
- Cost will also go up due to the kind of people one can recruit – PG degree/ diploma holders or Graduate with Five years experience and with CFP or similar certification.
- Giving up the distribution income is not really a possibility for many, as this income is the main income source. Fee income is miniscule or non-existent for many of them.
- The advisory process/ reporting/ record keeping requirements are of a considerably higher order for Investment Advisors, which will entail significant investments in terms of time, resources, manpower and hence money. Costs are going to go up due to this.
- The Investment Advisor has to be audited for compliance. Also, in case of a firm, a compliance officer would be required.
What are the problems that this regulation creates?
- It excludes many from the purview of the regulation – like Insurance agent, MF distributor, Stock Broker , CA, Lawyer etc. Now, if protecting the clients is one of the important objectives, excluding so many from the purview of regulation and allowing them to offer incidental advice is not really meaningful. For Investors, they still will get some advice from various sources and they may not distinguish between an Insurance Agent, Stock Broker or an Investment Adviser.
- Not many will register as IA. Investors will have little choice as number of IAs will be very low.
- This regulation does not expressly ask others to use designations that reflect their work, like Stock Broker, MF advisor, Insurance Advisor etc. Since, IA regulation is silent on this, anyone can call themselves anything – from Financial Architect, Financial Strategist, Financial Planner, Money Manager, Wealth Planner, Financial Coach etc. – all of which sound far more impressive as opposed to Investment Adviser and hence has more sway on the lay investor.
- If a person is willing to register as an Investment Adviser, would they have to give up their trail commissions from Insurance, Mutual funds etc. This is not clear and be a big problem for those who have built up significant income, over time.
- Lack of clarity is another of the problems. What does arms length mean? Can a SID be in the same office.
How to tide over the problems and become Investment Advisors
As it is, the regulation allows one to have Separately Identifiable department in case of corporate entities. Similarly, separation of business will have to be done in individual cases too and proper disclosures need to be made, when one deals with investors. It will be difficult but not impossible.
There could be big problems for Insurance Advisors, who may have to come under a corporate setup for ensuring their trail. Even then, problems would be there that need to be ironed out.
The other problem to be surmounted will be to inform clients about the regulation and the need to charge them for advice. This would be a long and arduous process, which may have to be done, one client at a time. But, it has to be done.
Why is it necessary to consider becoming an Investment Adviser?
It certainly is a difficult proposition to become an Investment Adviser. But, this is the direction in which the world is moving. The commissions to which most of us want to cling to, will disappear probably in the next three years, across products. It has already happened in UK & Netherlands now and is expected to happen in a whole host of countries this year. So, in future, we will anyway have to charge for services, much like a doctor or a lawyer.
If doctors, lawyers, architects etc. are able to live only by fees, is it too difficult for us to emulate that? I would only say that things are difficult for us, but once we get over these teething troubles, it will be much better for all of us. We will have to hunker down and survive this blizzard.
So, instead of being in denial, let us move forward and embrace change. This is just the beginning. It is like Pi finding himself with Richard Parker in the boat. We have a long journey ahead and storms to face and survive in future. Pi had remarked –“Richard Parker – it is because of you I’m alive. You keep me alert day and night and ensure that I lived all these days”. When there is no alternative ( TINA ), people do things which are otherwise unthinkable.
Let us reconcile ourselves with the regulation and learn to live with it – like Pi. His journey was so fantastic – the fantastic glow of neon algae in the middle of the ocean, dolphins jumping about, a blue whale surfacing or a carnivorous algae infested island – that the journey itself became the highlight. Reaching the shore, he did. We would also one day reach the shore and live to tell our tale of adventure. But, let us also enjoy the journey – it may actually be a fascinating journey of courage and conviction, which we would look back with pride.
Authored by,
Suresh Sadagopan
Founder
Ladder7 Financial Advisories
Mumbai
Awesome Post Suresh – I can relate to Pi 🙂
Excellent! Really great inputs to all.
Thanks Hemant & Rupakumar!
Very well put, Suresh.
Like Pi, we have to overcome our fears and learn to survive. I do not know if it will happen here too, but Pi (in the end) he realises that Richard Parker (Pi's fear) was actually his savior. The raft (as I understood it) was FAITH (in our case, belief in what we do) which one has to build oneself log by log and which will finally help us reach the shore. Never give up your faith – faith in yourself, faith in your vision, faith in a better world.
Fantastic writing Suresh. I have always been an admirer of your writing skill.
Great Insights Suresh, covered all the aspects with an equally interesting co – relation.
Amazing Suresh Sir !
You rightly said , it will be a journey of courage & conviction .
I guess we can also put it in this way "When the going gets tough, the tough gets going "
Suresh, I make it a point to try and read everything you write! Your thought process and flow of words show how clear you are:) Liked the alternate names given to INvestment advisor. Thank you for sharing this and continue to enlighten us!
Hi Suresh !! Very nice adaptation of reel life to real life…Tough task to handle our own Richard Parker !
Thanks Chetan, Kalpesh & Manish. I'm happy to note that you enjoyed reading it 🙂
Thanks Dilshad for your kind words. I will do my best. Thanks Prashant… while things may be tough, we need to anyway do it. I think each one of us will find our own way of handling our Richard Parker!
wow what an awesome article we need to survive this and time will sing our courage and valor i always beleive if you are right the everything is right and regulations are discipline of doing things right and honestly
Suresh Sir Hats off to you for your insight
Sudhir Anand
Thanks Sudhirji
Thanks Suresh Sir….your views always inspire the community to move forward…
Abhinav
Thanks Abhinav. You have always been lavish in your praise. I do certainly hope that the community finds the hope needed to get going!
Sureshji, really this message is for the doers. We have no other alternative, we may have to change our strategies when situations demand, sometimes we try to relate ourselves with Fictions and motivate ourselves as we like adventures(compulsion), risk and return tradeoff…thanks for your valuable inputs..
What a wondeful way to put across hard hitting truths! Thanks Suresh…..enjoyed reading your article as always 🙂
Hello,
Suresh je it is really touching one, if we imagine it will work towards in the same direction.
Thanks to keep us alive on the path.
Hi,
Sureshji, good & excellent clarification. Yes it is very true that world is going in the direction of financial advisory. really difficult for many, but we have to adopt the situation.
thanks.
Thanks Kiran , Rajendra & Nayan for your words of appreciation and for letting me know that this article is helpful. It will be my endeavour to be useful to our community so that all of us can move forward, embrace this change and do well.
First of all i have not seen the movie. but i do agree we need to adapt to the regulartory changes.
I have one query,what happens if the advisor is already registered with sebi as "stock broker". Can he cliam exemption and still contiune to act as fee based advisor?
My understanding is that a stock broker can give incidental advice only ( which means pertaining to stocks ). I understand though what you are asking… which is, though you have been a stock broker till date, can you also provide advice as an Investment Adviser if you comply with all that has been laid out. As per my understanding, it is No.
Investment adviser shall not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which the advice is provided.
So, here apart from the remuneration for product being advised, you are not to receive any other remuneration. Brokerage is clearly a transactional remuneration, which according to me cannot be classified as advisory income, though the same is paid by the client.
However, we would need clarification on this.
Does that means stock broker has to surrender sebi certification to register as investment advisor
Great piece.. Suresh! Enjoyed reading it! Time to take that decisive step to become a fee only adviser! The pay offs in the medium term to long term are worth it! Both for clients and us!
Thanks Partha. Yes, we need to take it in our stride and see how we can benefit from it.
With all the negativity around the subject, it is a welcome change to read something so positive about it. Change often starts with denial, I think that is something we need to skip this time and move to acceptance quickly. Once we accept, our energies can be devoted to the future course of action. Thanks Suresh, always wonderful to read your articles.
You are spot on Neeti. We need to accept what we cannot change and see how we can benefit by it. The regulation is not going to wait for us to wake up and accept the inevitable. The earlier we accept this and move on, the better it is for all of us.
Suresh – could not agree with more. In fact I have always felt that there may be a lot of good hidden in these "adverse circumstances" that is likely to lead to a lot of short term pain. The best thing that these regualations do is that they "regulate". A "well" regulated industry lends credibility to all professionals engaged in that "regulated" industry.
Look forward to listening to your views tomorrow.
I agree with what you say. We have to take these positively and see how we can forge ahead.
Looking forward to meeting you tomorrow 🙂
Thank you Sureshji,
It was great and very inspiring article, though the clarification will come with more time, we need to prepare ourselves for the changes. Your articles inspire to accept and adapt the change rather than wasting our energy in fighting with it, like Pi who accepted the presence of Richard Parker and in the end both are survivors.
Suresh… thank you very much for this message to the fraternity and holding the spirits high in these trying times. I simply loved the movie, but have started admiring and connecting to the movie more now 🙂
You are welcome Sadique. As a senior in this line of business, I verily consider it my duty to help fellow practitioners, in whatever small way I can. I'm happy to note that the message of hope that this article holds out,is well received. Nothing is as bad as it appears to be at the first instance. There are always going to be positives in every negative things we see happenning. Forest fires may sound like wrecking destruction – but they also refertilise the soil and clear the ground for new species to put down roots and grow.
There is another thing I have heard before, which applies to us – Keeps the fears to yourself; spread the hope.
I think that is what we all need to do. We all live on hope; infact life is all about hope. And ardent hopes turns to dreams. With concerted action they will turn to reality.
Dream big & make that happen, should be the mantra for our community.
Dear Suresh,
You have yet again proved you are a master.
Hitting the nail on the head but making the hit painless, with the analogy of Pi you have demonstrated that the changes are indeed fact not fiction.
Thank you Sir, for a great writeup on an issue which is staring at us us hard and square and like Pi & Richard Parker, we shall have to take the bull by the horns or perish.
Thanks Mohsin. I do hope all of us internalise the message in the real earnest and surge ahead with renewed vigour.
Dear suresh i always read your inputs. This one is very special. The fact is you have to convince youself first and have the courage to take it forward. Very well said.
Thanks Vijay. Sometimes all one has is their conviction alone to back him up. But with only that, all other things also fall in place, surprisingly.
Thanks Sureshji.
You have given a booster dose to those who are willing to work as an Investment Advisor.It was agreat inspiring article. But first we have to convince ourselves and prepare to accept the changes which we have to accept any how. We have to choose and accept and stick to it. Change is hard but once accepted our energy moves to that direction and like Pi and Richard Parker we will survive.
That's right Rima. Thanks.
Thanks for a wonderful piece on the new regulations Mr. Sadgopan. We debate within ourselves often about how life changes and some swift moment. Thanks to people like you inspiration flows to adapt positively to these changes