- I am delighted to be here this morning to share with you my perspective of the fast growing industry of financial planning.
- But first, allow me to thank the organisers, the Financial Planning Association of Malaysia (FPAM), for inviting me to deliver the keynote address today and to congratulate them for hosting this very important event.
Ladies and Gentlemen
- As financial markets become larger and more complex, and products more varied and sophisticated, the array of choices available for retirement benefits planning grows.
- The opportunities for the financial planning industry are therefore significantly enhanced, and will undoubtedly continue to grow, especially with the ageing of the population, the increasing range of financial opportunities and the greater financial literacy of the investing community. The Securities Commission (SC) sees the development of the financial planning industry as a critical component of capital market development in Malaysia.
- Financial planners play a key role in helping individuals to manage their financial affairs and provide for their future. Financial planning is no longer the preserve of the high net worth individuals with significant wealth. Rather, it is now also an issue for the middle income individual; an under-served market which represents a potential opportunity for the financial planning community.
Change of Demography
- The fast pace of expansion of industrialisation and trade in recent years has contributed to spectacular economic growth and social change globally, particularly in Asia. Developing countries including Malaysia, are already taking centre stage in population ageing. Globally by the year 2025, it is projected that the elderly will number about 1.2 billion of which three quarters will be in developing countries. In these developing countries, the total population is expected to increase by 45% by 2020, from 1980, while the elderly group will increase by 80%.
- As a result, the average retirement age will rise where the demographics make this inevitable. With buoyant economic growth, consumer demand for financial products and services can only grow at healthy rates.
- These demographic trends have significant implications for the population, chief amongst which is the need to provide for financial security in old age. The more educated the population, the more demand for wealth planning and protection to meet long term needs. I believe the framework for ensuring financial security must be supported by, amongst others, a strong and professional financial planning industry.
Trends in Financial Services Industry
- Today’s financial world is highly complex. Investors must be able to differentiate between a wide range of products, services and providers of financial products to successfully manage their personal finances. Deregulation has also created important structural changes in the financial services industry and has contributed significantly to creating a market place that is increasingly competitive and highly innovative as a result of entry of new players and expansion of existing players. At the same time, the adoption of new information technologies has expanded the scope and utility of financial products that are available to the individual investors.
- As market forces continue to expand the range of financial products and providers of financial services, investors are faced with the challenge of having to choose from among the myriad of financial products and providers. As these developments challenge the ability of the ordinary investor to plan for his own finances, there is an increasing demand for professional advice that caters to his investment needs.
The Importance of Planning
- In these increasingly exuberant times, in a profession where the term “planning” stands out as its raison d’être, the financial planning profession itself needs to be well prepared to ride the peaks and troughs of the economic cycle, as investors’ confidence is tested, as it has been, time and time again by adverse economic events.
- Experience in Australia demonstrates the importance of the orderly development of the financial planning industry. Australian regulators were concerned with undesirable practices amongst financial planners in reaping hefty remuneration and fees regardless of the effectiveness of the financial plan drawn for their clients. A survey of standards in Australia reveal that financial planner’s fees are often prioritised above clients’ risk profiles, resulting in a deviation from the primary objective of ensuring that the clients’ financial and life goals are met. The message here is that the mode of packaging financial advice in a “thinly disguised product selling” manner should be prohibited, if the integrity of the industry is to be preserved.
- It is important to remember that in an environment where transparency and disclosure are imperatives in maintaining investor confidence, financial planning associations must encourage their members to hold themselves to the highest ethical standards of conduct. The need for disclosure and transparency in the financial planning process is crucial, as it re-enforces trust and faith between the customer and the planner and most importantly – in the plan itself.
Robust Growth of the Malaysian Capital Market
Ladies and Gentlemen,
- This conference takes place at a time of significant development for Malaysia. In so far as the Malaysian capital market is concerned, post crisis, all components of the market have seen remarkable growth. The number of companies listed on the Kuala Lumpur stock exchange has increased from 732 in 1998 to 923 today with a market capitalisation of more US$186 billion, up from US$46 billion at the lowest point of the crisis. The number and variety of unit trust funds have also seen significant growth with 243 funds and more than 10 million accounts. The net asset value of these funds amounting to nearly US$19 billion represents almost 11% of the market capitalization of the KLSE. Recent years have also seen the successful development of the corporate bond market as a source of financing to complement the banking and equity sectors. Today, the ringgit corporate bond market finances roughly 52% of Malaysia’s GDP and new corporate bond issues have been growing at an average annual rate of 28% since 1999.
- Economic growth and high savings rates offer attractive prospects for the financial planning industry in Malaysia. However financial planners need to ensure that they are in a position to remain relevant and continuously serve the changing demands of investors and the changing landscape of the capital market. In this regard, financial planners must ensure continuous innovation, enhancement of skills and uphold the highest standards of professionalism.
Principles Underpinning the Regulatory of Framework of the Financial Planning Industry
Ladies and Gentlemen
- As you may be aware, the recent amendments to the Securities Industry Act 1983 that came into effect in January this year provides for a comprehensive and holistic framework for the regulation of the financial planning industry. The new regulatory framework is underpinned by three (3) key principles –
a. a streamlined and efficient regulatory framework which provides for consistent levels of investor protection;
b. regulatory certainty; and
c. the educational role of financial planners.
Let me elaborate.
Streamlined and Efficient Regulation
- The Capital Market Masterplan released by the SC in 2001 envisions that the financial planning industry will complement the investment management industry by helping to broaden consumer awareness of the different products and investment strategies available to them. The SC is therefore committed to facilitating the development of the financial planning industry in Malaysia. It is crucial to construct a regulatory framework that is efficient and that ensures consistent levels of investor protection across all financial products. This is crucial in empowering investors to make informed choices.
- Financial planners, on the other hand, should provide quality advice to their clients, based on a clear understanding of the clients needs and objectives, while ensuring the clients clear understanding of the expected returns and risks associated with the underlying products. In other words, having regard to all the circumstances, the financial planner must serve the best interests of the customer.
Providing Regulatory Certainty
- The amendments to the Securities Industry Act have eliminated much of the confusion that existed on the status of financial planners, and the nature of regulation that they are subject to. Also, as a result of the amendments, the use of the term “financial planner” is now confined to persons who are licensed under the SIA. The SC also revised the “Guidelines for Investment Advisers and Investment Representatives under the Securities Industry Act 1983”, to stipulate the minimum qualifications required for financial planners.
- These changes were introduced to address the lack of clarity due to the existence of different groups of so-called financial planners, whose modus operandi were the same but were nonetheless called by all sorts of titles or names. These different titles (such as financial consultant, investment consultant, financial advisor) whilst adding variety to the financial planning landscape, served only to confuse investors. Compounding matters further is the fact that amongst these experts reside opportunists who are neither qualified nor have the best interests of the investor at heart. Here is where the restrictions on the use of the term “financial planner” sets in. We believe that compliance with the requirement of licensing is good business as investors would have greater confidence in dealing with financial planners who have appropriate qualifications, are properly licensed and held to the highest standards of integrity and professional conduct.
- The effects of the recent law reform are already visible, based on the positive response received. The SC hopes that this will elevate the profession to a level similar to that of other capital market investment advisory service providers, as well as provide greater recognition to the financial planning profession with a view to enhancing professionalism and quality of service.
- With the existence of qualified financial planners, it is even more urgent now for financial planning associations to take upon themselves the responsibility to ensure that the highest standards of professionalism are practised. The hallmark of a professional body is after all the quality of the standards it imposes on its members and its ability to discipline. This will enable a relationship of trust and reliability to flourish between the financial planners and their customers and ensure that the integrity and reputation of our market is preserved.
- Terms such as “professionalism” and “integrity” cannot be alienated with the term, “self-regulation”, serving as a reminder to all associations on their regulatory role in assuring good governance. The code of ethics and best practices promoted by the financial planning profession must be consistent with the basic tenets encompassed in international best practices which emphasise fairness, responsibility and accountability.
- Unlike other investments, where returns are matched with risk profiles, the financial planning process goes a step further by also factoring in the investors’ life and financial goals. In light of the dynamic nature of these goals, the challenge in devising innovative plans stands out as a tough but achievable task. Using unit trust funds as an example, an investor may view it as an investment avenue that provides the opportunity to diversify and leverage on the expertise of professional fund managers. In a financial planning context, further thought process is injected, as investments in unit trust funds are tailored towards the investors’ risk profiles and timed at meeting certain life and financial goals, such as to cater for higher education expenses or to meet future payments. The success of the financial planning process in improvising on the investment process, will lead to a shift in the image of financial planners from being viewed as product-sellers to product-innovators.
Role of Financial Planners in Educating Investors
- Ladies and gentlemen, I believe that education can play a critical role by equipping investors with the knowledge required to choose from among the myriad of financial products and providers. In particular, education will help to prevent vulnerable investors from suffering financial devastation. An informed investor is simply less vulnerable to fraud and abuse.
- In this context, I wish to call upon the financial planning profession to take a two-pronged approach towards education and awareness. The first is to ensure that your members are kept fully apprised of developments and innovations, to ensure that efforts to upgrade and enhance skills, competence and knowledge are pursued vigorously and relentlessly. Only by doing so can the continued relevance and survival of the profession be assured.
- But equally important is the need for financial planners to play a role in investor education and awareness programmes. This must be seen as a necessary investment on the part of the profession because financial education can empower investors to better evaluate the different products and services that they can access, thereby effectively increasing their real purchasing power and providing more opportunities which demand further financial planning services.
- In so far as Malaysia is concerned, whilst the SC is committed to providing the necessary support to the industry in facilitating innovation, enhancing professionalism and promoting education and awareness, the challenge remains with the industry to drive these programmes in your sector of the market. In this regard, the SC is happy to work with industry, in efforts to further develop and strengthen the capital market. It is hoped that such collaboration will not only benefit the financial planning industry but also contribute towards the robust development of other segments of the capital market, particularly the investment management and private pensions industry.
- Undoubtedly, competition can only intensify. This will be good for the industry as a whole and for the investors who would have a wider array of services and products to choose from, at hopefully, competitive rates.
- In conclusion, let me say that the introduction of new technologies and market innovations will certainly bring new challenges and new possibilities to the financial planning industry. Although we cannot know the precise directions in which these changes will take, we can reasonably expect that the pace of technological development and competitive pressures will increase. The most logical approach in addressing these challenges by the financial planning industry would be to boost its investments in upgrading standards and competence in the industry and through dedicated efforts to educate investors to raise their financial literacy levels.
- Ladies and gentlemen, thank you for your attention. I now officially declare open IFPAC 2004.