Emerging Challenges For Investment Advisory
Investment advisory is a sphere that has, and continues to go through constant evolution. The advent of the SEBI Investment Advisor Regulations in 2013 bought a space that was loosely regulated until then, under the purview of a set of much more stringent regulations. The effects of the changes brought about by the shift in the stringency of regulations have brought in a lot more quality to the advice is delivered, recieved and acted upon. But in the coming years, investment advisory as a practice must brace itself for an entirely new wave of evolution that will be game changing and inevitable. And adapting to this wave of evolution would doubtlessly present its own set of challenges for advisors. Advisors must understand how these changes will impact their practice and adapt to them in order to ensure that their skills and services remain relevant and their practice continues to grow in the years to come. Therefore in today’s post I’m going to talk about each change that is going to impact the practice of investment advisory, the specific challenges they would present and how these challenges can be dealt with and benefitted from effectively.
Technology will have a huge role to play in the way investment advice is delivered and consumed going forward. The most compelling evidence of this fact is borne out in the growing use of robo advisors in the advisory process. Robo advisors are online platforms which provide financial advice and investment management services online with little to no human interference or involvement. For a better understanding of how robo advisors work take a look at the graphic that follows.
Though robo advisors take clients' risk profiles into account when offering their recommendations and make acting on those recommendations highly convenient through the use of technology, they are not as efficient when serving clients who have slightly more nuanced needs. This is because understanding and solving the specific nuances in a particular client’s situation requires professional judgement which requires human involvement. Therefore, robo advisors would be well suited to clients who have very basic needs. But those who have more complicated needs would be better served working with traditional advisors. Also, though robo advisors may offer preset portfolios for clients to choose from, if the products within these portfolios lack liquidity (predominantly seen in the case of small and microcap stocks), clients would have to bear significant costs when executing transactions. A possible solution to go around these drawbacks would be to improve underlying technology that robo advisors employ through constant innovation. A hybrid mode of delivering advice where human advisors and robo advisors are equally involved could be another option going forward. This would allow advisors to incorporate technology into the services they offer and the advisory process they employ. It would also allow them to serve a wider base of clients, regardless of whether they have the most basic or slightly more nuanced needs. This would ensure that human advisors retain their relevance even with the element of technology involved.
Ever changing dynamics in the relationship between advisors and clients also presents a significant challenge. Firstly, the speed at which clients process, accept and act on the advice imparted to them has changed. In the past clients would have been more likely to act blindly on the advice imparted to them. And this sometimes proved to work to their detriment, especially when substandard advice was imparted to them by fraudulent advisors. This has seen clients become more aware and well informed regarding basic concepts of investing, personal finance and financial planning. As a result, clients today are much more likely to think through every bit of advice imparted to them before acting on it. This is certainly a welcome development. But, it could also lead to clients overthinking before they act. This delay in action could lead to them missing out on golden opportunities which come once in a while and don't last for long. For example, let's say an advisor asks a client to buy a large cap index fund right after a big market crash. The client thinks the advice through and buys the prescribed fund 3 months after the advice was imparted. Now, the market witnesses a 20% recovery between the date of the crash and the next six months. But because the client only purchased the index fund after 3 months, they benefit from just an 8% increase in the value of their position in the fund. The remaining 12% is effectively lost to the disproportionately long length of time spent in analysing and judging the advice before acting on it. Taking a few days or a week to analyse before acting on advice is something clients must definitely do. But stalling action for longer than that makes very little sense at best. This could ultimately lead to a situation where clients and advisors both point fingers at each other for the substandard result that was achieved. And this would be of little help to either party. Therefore, advisors must ensure that they communicate clearly with clients and do their best to ensure clients act on their advice in a timely manner. Clients on the other hand must learn to put more faith in their advisors and act on advice imparted to them after a reasonable amount of thought and analysis.
The SEBI Investment Advisor Regulations, 2013 have always laid emphasis on ensuring that advisors adhere to the highest standards as far as compliance is concerned. And with most aspects of the advisory process going digital, the job that advisors have on their hands in terms of ensuring compliance with the regulations is only going to get harder. As recently as October 2020, a fresh set of compliance regulations were introduced, adding to the regulations which were already in place. The new regulations additionally require advisors to undergo an annual audit, as conducted by a qualified chartered accountant to ensure that they are compliant with every regulation that is relevant to them. Advisors who have their own websites are required to display major details such as their name, registration number, office address, contact information and details of outstanding client complaints on their websites. Advisors are also required to clearly spell out the duties of both the advisor and the client as part of the process of onboarding the client. Do's and don'ts for clients also need to be prescribed. Payment of advisory fees are allowed to be accepted via prescribed banking channels and invoices or proof of each transaction must be maintained at all times. These are just a few of the regulations which advisors must ensure compliance with. And more regulations will be introduced in the years to come. Clearly, keeping abreast of such a wide variety of regulatory requirements is going to be a challenge. Therefore, advisors must ensure that they have the relevant personnel and systems in place so that ensuring compliance is a lot smoother and simpler.
Investment advisory is a sphere that has experienced constant evolution and this will only continue in the future. Advisors and their practice will continue to be impacted by the challenges brought about by the evolutionary changes discussed above. Therefore, advisors would be best served embracing the challenges they face today and those they will definitely continue to face in the future. This is because if advisors were to meet and handle these challenges effectively, it would ultimately translate into further evolution for their services and offerings. This would ensure the best advisory experience for clients, thereby facilitating greater client satisfaction, easier client retention and increased lead generation, leading sustained growth and enhanced reputations for advisors.