‘Financial Planning in Malaysia: Developmental Issues and Challenges’
Dr Nik Ramlah Nik Mahmood
Director, Market Policy and Development
First National Convention of Chartered Financial Consultants
12 October 2002
Cititel (Mid Valley), Kuala Lumpur
Allow me first to extend my appreciation to the Malaysian Association of Chartered Financial Consultants for kindly inviting me to address the distinguished convention participants and to congratulate them for organising the First National Convention of Chartered Financial Consultants. The timing of this convention is especially pertinent given the considerable and growing interest in Malaysia to develop the financial planning industry.
At the Securities Commission (SC), we are aware of the paradigm shift from products and volume of sales to service orientation. Financial service providers have not only realised the significance of financial planning in expanding the scope of their activities, but many have started to equip themselves to face the growing demand from members of the investing community who are becoming more aware of the need to have professional guidance and advice in managing their personal financial affairs.
The initiative to hold this convention is certainly consistent with SC’s agenda for the capital market, as set out in the Capital Market Masterplan (CMP), to facilitate the development of the financial planning industry. From the broader capital market developmental perspective, we view financial planning playing a very significant role in supporting and complementing the various CMP recommendations, such as the development of market institutions and specific products and services such as equity, bond, derivatives and Islamic capital markets, as well as market intermediaries, investment management and collective investment, private pension and even venture capital.
The need for financial planning
There is no doubt that financial planning services would become increasingly important as financial and capital markets grow bigger, and become more advanced and sophisticated. The financial planning industry will act as an important link between investors and the growing array of products available for investment and savings. Moreover, as the nation progresses and individuals grow wealthier, the complexities of their financial needs would increase as well. Tax structures are likely to become more complex; short and long-term financial and lifestyle goals would certainly change.
Financial planning, therefore, would provide the public with the discipline and professional assistance needed in successfully managing their personal financial affairs. I am sure that those of you who are familiar with the more developed countries are aware of the kind of market pre-conditions that led to the development of vibrant financial planning services in those countries. These too are becoming a major driving force in Malaysia.
At the individual or retail level, the major drive for financial planning is to ensure consistency in the living standard and provide financial security for ourselves and our loved ones. Statistics from the United Nations indicate that the life expectancy in the country has increased from 47 years in the 1950’s to 70.6 years currently for men, and from 48.5 years to 75.5 years for women. Yet the retirement age has hardly changed. This can cause a significant diminution to the retirement fund. Even statutory contributions for retirement savings may not be sufficient in the longer run.
The situation can be more alarming for the self-employed who do not contribute to any statutory pension scheme and have not taken any prudent steps to provide for their golden years. This means it is absolutely vital to make our money to work harder, or rather, smarter. In this respect the financial planning industry would ensure that, as the wealth of the country increases, we would make a successful transition from a nation of pure savers to a nation that not only saves, but also invests for our future.
Enhancing standard of market professionals
The financial planning profession provides value-added services and packages financial arrangements after analysing all the relevant financial and background information of the clients. This includes considering where he is now, what he may need in the future and what he must do to reach his goal. Clearly, a financial plan is developed through a process of relationship building with the client where the focus should not be on selling the products but the planning process itself.
The professional financial planners from the more developed countries will tell you that it took them many years (e.g. United States took more than a decade) to not only change the perspective of the general public towards financial planning but also the mindset of the planners themselves, to shift the focus from product pushing to really servicing the client, prescribing them with what they need instead of what planners wish to sell.
I could not emphasise enough the importance of adherence by members of a profession to their professional ethics and standards in order to enhance the recognition towards the profession. At the same time, the professional body would need to have proper mechanisms in place for immediate action against the misconduct of members. These can significantly boost public confidence in the self-regulatory capability of the profession thus enabling the regulators to progressively allow for greater liberalisation resulting in more flexibility within the industry for the benefit of all.
To this end, I am delighted to note that the various codes of ethic adopted by most professional organisations representing the financial planning community, including that of our gracious host today, expressly recognises the need for financial planners to conduct their profession in a manner that is independent, fair, competent and objective while at the same time observing high standards of professionalism and integrity. This is reflected by the pledge made by the Malaysian Association of Charted Financial Consultants in conjunction with Malaysian Insurance Institute to work closely to ensure the Code of Ethics and Canons are adhered to by their students and graduates.
Ethics is at the core of every healthy industry. Wise investment professionals, for the sake of the industry, will support the goal of “setting a higher standard” and enforcing it, which has a far-reaching effect in enhancing corporate governance practice at various levels. The code of ethics and best practices promoted by the financial planning profession are consistent with the basic tenets that underlie good corporate governance, as has been expressed by various codes and best practices of corporate governance globally – fairness, transparency, accountability and responsibility. These represent values that in fact underpin all forms of good governance, regardless of whether it is applied to an individual, a profession, an institution, a market or even an economy.
At this point, I would also like to take the opportunity to applaud the efforts made by many intermediaries in the capital market that have invested in professional education to enhance the knowledge and capability of their staff and agents. This would eventually contribute towards enhancing the standards within the profession by setting a higher benchmark for new entrants. I hope this trend would continue and many more employers would follow suit resulting in a greater pool of quality ethical financial planners much needed by the public.
In this regard, perhaps it is also timely to remind all professional financial planners as well as potential new entrants that, although we encourage you to know and understand as many products and services in the market to be able to tailor the most suitable recommendation for your clients, please confine your recommendations to financial products or investments that are approved by the regulatory authorities or that are in compliance with the relevant market rules and regulations. In fact we would appreciate it if you can help educate the investors with regards to the modus operandi of numerous types of illegal schemes. This would assist investors to avoid falling prey to such operators who are taking advantage of the investors’ ignorance, guillibility and greed. It is a shame to know that so many investors had been deceived by these operators and millions of ringgit had been lost through investments in such schemes.
Financial planning and capital market regulatory framework
So where does the financial planning industry stand vis-à-vis the regulatory framework of the capital market? The answer is financial planning is already part of the family. Financial planning is about advising others on their financial positions and the process involves providing advice on, among others, various capital market instruments, such as unit trusts, shares, bonds and other securities.
In that respect, the law requires that any person who provides advice concerning securities, must acquire at least an investment adviser’s licence, and if your business includes managing client’s funds, then a fund manager’s licence would be necessary. Of course there are safe harbour provisions that exempts certain persons from the licensing requirements but it must be understood that more often than not, these relate to activities that are incidental to specific businesses. It cannot be used to undertake financial planning activities that relate to securities.
However, the SC acknowledges that financial planning and activities are expanding and getting more complex. As such, the licensing framework must also be dynamic and able to respond effectively to these changes. In this regard, consistent with the recommendations of the CMP, the SC is currently reviewing the licensing framework across the capital market to ensure level playing field, without compromising the integrity of the market and protection of investors. Let me assure you that the efforts being undertaken by the SC are not to stifle the market but are aimed at ensuring regulatory parity across various segments of capital market players.
We would also like to see financial planners playing the role of one-stop financial centres for the investing public, which means enabling them to execute their advice by distributing the suggested products to the clients, but there must always be proper safeguards. I would like to urge all financial planning practitioners to adhere to the relevant laws, regulations and guidelines associated with the profession, as this would enhance the credibility of the profession in the eyes of the public, boost market confidence and allow greater acceptance towards the profession.
Although enhancement of professional standards and streamlining of market regulations would provide some form of basis for the further development of the financial industry, the real challenge is on the financial planners themselves. You have to focus on your core business and the task of providing professional service to clients, and not be distracted by the sale of financial products, as it is a well-known fact that the success of a new industry would largely be dependent on market acceptance to this new kind of professional service.
In relation to this, financial planners and originators of financial products alike must take heed of this and be careful not to kill the goose that lays the golden egg. In a nascent and growing industry, it is easy to forget this when the focus is solely on increasing one’s market share. However, for a business in a highly competitive industry to be able to go from strength to strength, you just cannot run away from the fact that you need to maintain the trust and goodwill of your clients and to further build on that reputation to be able to gain new markets.
In this respect, financial planners, whatever their remuneration structure or arrangement, must always put the interest of the clients first and ensure that any advice given does not in any way contradict this principle. In other words, the financial advice must not be “tainted by salesmanship”.
All this while I have focused on the need for financial planners to impart their advice in an independent, ethical and professional manner. However, this would only constitute one side of the equation. Equally important is that product originators, namely unit trust management companies and insurance companies, should also give proper recognition to the financial planning profession, and not consider it as a means of enhancing or expanding their distribution network. Failing to adequately give such recognition may result in these financial planners being regarded or treated no differently from their ordinary sales or distribution force, resulting in the same competitive pressure being applied on them. This should be avoided as it could affect the level of professionalism and integrity of the financial planners, which may have a bearing on the pace of development of the financial planning industry in Malaysia.
Training and education
Consistent with the CMP recommendation on training and education, the Securities Industry Development Centre (SIDC), which is the SC’s training arm, in collaboration with other relevant organisations, would develop appropriate training programmes to complement those offered by professional organisations, such as the Malaysian Association of Chartered Financial Consultants and various institutions of higher learning. This is in line with our commitment, as stated in the CMP, of ensuring that current market participants are fully prepared to benefit from financial planning and also to ensure the development of a pool of high-calibre financial planners.
In order to ensure that the development of the financial planning industry meets the expectations of all stakeholders, the SC would need to leverage on the knowledge, experience and expertise of those in the industry. In this respect, we would strive to work closely with the relevant organisations representing the common interest of the financial planning industry.
There would therefore be scope for greater consultation, collaboration and engagement between the regulators and organisations representing the financial planning industry. Today is in fact a good example of this and I hope there will be more to come in the future.
The development of the financial planning industry would bring about a fresh, if not new, dimension in the financial and capital markets. However, the development and implementation process, need to be managed properly and adequately so that the end result is that the financial planning industry would always and easily be associated with the provision of a complete, cohesive and comprehensive plan or advise for clients’ financial affairs, and definitely not as a source of confusion.
In relation to this, the SC welcomes your input and ideas as we work through the challenges that lie ahead, not just with respect to the development of a viable financial planning industry but with respect to the development of our capital market as a whole. As has been said many times before, there is only so much the SC, and other regulatory bodies can do in preparing the Malaysian capital market for challenges ahead.
Ultimately, the success of any developmental endeavour hinges on the combined efforts and commitment of all market participants. I hope that the strategic partnership between industry and the regulatory authorities would see us achieve our common vision for the capital market, and lay a strong foundation for its further progress thereafter.