I would like to thank the organizers and the Financial Planning Association of Malaysia for inviting me to deliver the keynote address at this conference. It is indeed my pleasure to be here, to speak to industry professionals from the financial planning industry. The topic “The New Frontiers of Financial Planning in Malaysia” is very apt and I am happy to be able to share my thoughts with practitioners on the SC’s views on the development of the financial planning industry.

Globally, there is evidence that wealth creation and accumulation continues to be on a rising trend, driven principally on the back of GDP and market capitalisation growth particularly in emerging markets such as Latin America, Eastern Europe and Asia-Pacific. The Merrill Lynch/Capgemini World Wealth Report 2007¹ projects that the financial wealth of high net worth individuals will reach an astounding USD51.6 trillion in 2011, growing exponentially at an annual rate of 6.8%. This report also suggests that the investing behavior of high net worth individuals has become more global, driven by expanded awareness of international developments and sophisticated investment products, better portfolio performance and risk mitigation.

These are potentially powerful growth drivers for the financial planning industry. As investors are presented with greater opportunities to allocate their capital across asset classes and diversify their risks beyond their geographic boundaries, the demand for financial planning services will become even more significant as individuals seek professional expertise to assist them in framing asset accumulation strategies and selecting appropriate investments from the myriad of products from financial services providers.

The bright outlook for the global financial planning industry is matched by similarly excellent growth prospects for the Malaysian financial planning industry. Underpinning the potential growth is the favourable demographic structure with the proportion of Malaysians above the age of 60 projected to grow to almost a quarter of the population in Malaysia by 2030². In addition, the wealth of individuals is expected to rise at a rapid pace particularly given Malaysia’s aspirations to achieve developed nation status by 2020.

The combination of an expanding work force, an aging and highly educated population and rising affluence will translate into expanding need for professional advice on how to plan the nurturing of their financial wealth. Individuals will increasingly migrate from salesmen offering product-centered transactions without concern for client needs and objectives towards the sophisticated services provided by well-trained financial planners who want to understand their clients and make appropriate recommendations. Indeed, this is a trend we see in developed countries which we believe will be repeated in the fast-growing Malaysian economy.

Development of the financial planning industry

Ladies and Gentlemen,

I would like to emphasize that the SC considers the financial planning industry to be of substantial importance in developing a full value chain of capital market intermediation services to meet the future financial needs of Malaysian investors. A well-developed and thriving financial planning industry is critical to ensuring that Malaysians will have access to the high value-add services that a well-trained financial planner can offer. The financial planning industry is therefore a vital cog in the wealth management industry wheel. As the industry is well aware, the SC has invested considerable efforts in providing a robust regulatory framework to ensure high standards of investor protection, and we will continue to provide the necessary support from a regulatory and developmental perspective to assist the orderly and healthy growth of the financial planning industry in Malaysia.

The development of the financial planning industry is still at the infancy stage at the moment. From a holistic perspective, we believe that several of our developmental initiatives will contribute to creating a conducive environment for the industry to galvanize its growth momentum.

First and foremost, the natural feedstock for the growth of the financial planning industry is an expansion in product range in the capital market. In itself, the expansion in the variety and complexity of products will necessitate the need for financial advice. But beyond this, the availability of a wide range of sophisticated products will provide financial planners the ability to construct a portfolio for clients that comprise a diversified asset class and, even within each asset class, a broad range of products that provide the appropriate risk-return profile. The superior knowledge of how to match client needs with the right asset diversification strategies is key to enhancing the value-add offered by professional financial planners.

In this context, the SC has undertaken significant liberalization measures in relation to enhancing product sophistication and has been a proponent of product innovation and expansion in tandem with other objectives of building an advanced capital market that can meet the needs of a diversified range of investors and issuers. For example, we have facilitated an expansion of the types of collective investment schemes. This would now make available a wider selection of asset classes available for portfolio diversification purposes such as bonds, Real Estate Investment Trusts (REITs), international investments as well as Exchange-Traded Funds.

The second critical development thrust has been to develop a comprehensive Islamic Capital Market with a wide array of products to meet the needs of investors who prefer to invest in Shariah compliant products. In this regard, financial planners will be well-positioned to service these clients and meet their portfolio needs as there is a broad range of Shariah-compliant products ranging from equities, sukuks, unit trusts, takaful, REITs and, most recently, exchange-traded funds. In addition, given that the SC has recently entered into a mutual recognition agreement with the Dubai Financial Service Authority for cross border distribution of Islamic funds, financial planners may in the future be able to select international products emanating from that jurisdiction.

It should be noted that financial planners offer a broad range of service beyond investment advice. This extends to planning of the individual’s assets and liabilities, as well as estate and tax planning. There is certainly a need to build expertise in providing financial advice in relation to shariah laws and this is indeed a potential area for development to be tapped by the financial planning industry.

On this note, I would like to therefore congratulate the industry for their far-sightedness in identifying the potential growth prospects in this area and in supporting our aspiration to develop Malaysia as a leading Islamic financial centre. As recently as late last year, the Capital Market Development Fund approved a grant to FPAM and the Islamic Banking and Finance Institute Malaysia (IBFIM) to develop a certification programme for Islamic Financial Planning in order to address the need to build a pool of well-trained, highly competent and professional executives who are knowledgeable about Islamic finance. The demand for Islamic financial products and services has grown in quantum leaps and there is an urgent need to expand the pool of professionals who are well versed in aspects of shariah and Islamic finance to ensure that the needs of Muslim customers are well served.

A third area of development has been the SC’s focus on enhancing the savings intermediation efficiency through removing distribution bottlenecks. These initiatives have actually expanded the role of financial planners in the various distribution channels and their access to a wider range of products. As the distribution channels widen, this will provide financial planners the competitive strength to source products for the clients at competitive costs from a wider range of suppliers. This is significant as the very basis of financial planning is intended to take into account the whole spectrum of an individual’s financial needs.

The Capital Market Services Act (CMSA) which was introduced last year established the legal basis for financial planners to deal in unit trust products through their holding of a “restricted” license for dealing in securities. In addition, the CMSA recognized the growing importance of the financial planning industry through establishing financial planning as a distinct regulated activity as opposed to the previous practice of treating financial planning as one of the many activities of an investment adviser.

In line with our capital market development policy, the Federation of Malaysian Unit Trust Managers (FMUTM) paved the way for financial planners who are registered with FMUTM to market and distribute unit trust products through the release of its Guidelines for the Registration of Corporate Unit Trust advisers for the marketing and distribution of unit trusts in October 2007. This augurs well for our efforts to further develop the financial planning industry to complement other segments of the investment management industry to create a conducive environment for investors to consider investing in a more extensive range of capital market products appropriate to their needs.

A significant development which will have a very substantial impact on the growth and capabilities of the financial planning industry is the facilitation of the licensing of fund supermarkets to allow online transactions of units as an additional distribution channel. Based on the past experience in developed markets, the financial supermarket provides a highly efficient platform for the financial planner to assess, source and monitor the investments of his clients. The emergence of financial supermarkets has been also a major development in reducing distribution costs of the various financial products. The lower product acquisition costs will then create room for the financial planner to tag on the appropriate premium for his value-add services. Eventually, financial supermarkets may work closely with financial planners to provide them the ability to outsource the back-office aspects of a financial planning operation to allow them to focus fully on servicing client needs.

Regulatory challenges

Ladies and Gentlemen,

Developing the appropriate regulatory framework for the financial planning industry is a major challenge for securities regulators. This is not surprising as the financial planning industry, which is still in early stages of evolution, can cover a wide range of areas ranging from retirement planning, unit trusts, investments, estate planning, trusts, taxation, investing on stock markets, debt and risk management, managed products, small business financial management and planning. This implies that the activities of financial planners can straddle the jurisdictions of many regulated activities as well as unregulated activities in which they are involved in providing advice to clients.

In addition, financial planning represents a converged activity. If one takes into account that the background of the financial planner may be biased towards the unit trust industry, insurance industry or investments, then one is likely to find that the regulatory philosophy and approach may not sometimes congeal in a consistent manner.

In Malaysia, the SC and the Central Bank have worked closely together to solve the problems of varying regulatory approaches through a “mutual recognition” framework for financial planners and financial advisers to streamline licensing, operational and regulatory issues as well as to minimize duplication of regulatory efforts while ensuring that there are no regulatory gaps. The objective of the mutual recognition framework was to ensure that a person would not need to obtain two licenses under two separate regulatory regimes in the delivery of financial planning or advisory services to the same customers.

In this respect, the nature of financial planning activities may make it an ideal candidate for self-regulation. The financial planning industry is likely to become more sophisticated and complex as it expands to cover a wider range of activities in the future. Self-regulation offers the advantage that the industry can lead its development and benefit from being able to more easily adapt and fine-tune its rules to cater for varying and changing circumstances.

However, the industry should take note of the stringent prerequisites for the recognition of a self regulatory organization which, at a minimum, would need the SRO to place public interest above its commercial interests, to demonstrate the commitment to take cognizance of and achieve regulatory objectives and to be subject to a regime of strong oversight. Experience in international jurisdictions shows that there are risks to healthy industry development if the self-regulated industries are unable to rise above their own self-interest. In this regard, the most critical aspect of good self-regulation is the willingness of a SRO to take effective enforcement action against errant professionals.

A recent survey by the Australian Consumers’ Association (ACA) and the Australian Securities and Investments Commission (ASIC) highlighted concerns that many financial plans provided to customers either did not meet their requirements, did not demonstrate how the advice was appropriate and, in some instances, did not even to comply with legal requirements.

At the heart of this debate lies the issue of whether financial planners can be independent and can place priority on meeting the needs of the customers if he was receiving commissions or fees connected to the sale of products from financial institutions. In particular, if commission-based financial planners were subject to meeting “sales targets”, then the conflict of interest situation is likely to be intensified.

This suggests that financial planners should ensure, through education and engagements, that there is appreciation by customers of the value-add of customised financial planning services. The ability to customise advice to the appropriate risk-return profiles and investment horizons of clients requires skilled and experienced professionals. It is natural therefore that these professionals would then seek to be adequately compensated through fees for the provision of such advice and services. It seems a logical conclusion that it is in the interest of customers and financial planners to gravitate towards a fee-based model rather than a product-transaction renumeration model so as to minimize the risks of indiscriminate selling of products.

Overall, as a regulator, we would be very concerned by any compromise or shortfall in the ethical conduct of market professionals. In this regard, I am pleased that the FPAM has taken the initiative to revise and update its Code of Ethics and Practice Standards. I understand that FPAM has adopted the Financial Planner Competency Profile from the International Financial Planning Standards Board, of which it is an affiliate, for the guidance of its members as well as in relation to the structuring and development of the certification syllabus and continuing education program. I hope to see further progress in the upgrading of the standards of professionalism and the advocacy of ethical conduct.

Conclusion

In conclusion, the SC believes that the financial planning industry can fulfill the genuine and growing need of Malaysian investors for high quality financial advice and will therefore provide the fullest support for the healthy growth of the financial planning industry. The crucial building blocks and regulatory infrastructure are already in place. I am also heartened by the dedication and commitment of the pioneering industry professionals, and their positive attitude to enhancing their professionalism augurs well for the future of the financial planning industry in Malaysia.

The SC would also like to enlist the financial planning industry as an important partner to promote financial literacy in the nation and to actively complement the SC’s drive towards enhancing investor awareness and education. We believe that enhancing investor knowledge and vigilance is critical particularly as capital market products become increasingly sophisticated. Financial planners can play a critical role in educating investors on the benefits and risks of various investment products through their meaningful relationships with the customer.

In closing, I wish to thank the IFPAC Organising Committee for successfully organizing this event and may I wish all of you a productive and fruitful conference.

Thank you