I used ‘educator’ on my LinkedIn heading before being told it sounds like a professor. Not that there is anything wrong with being a professor – I would love to be one, in fact – but it just intimidates my audience of mostly women and young people (for The Money Hans initiatives). I could tell they don’t like that title because they would change it when introducing me at their seminars/webinars and call me a financial or investment adviser, or investment consultant.

They can call me that, but I can’t. The problem with calling myself a financial or investment adviser is that the use of these terms is regulated. Just like you can’t call yourself a doctor unless you are qualified and licensed, you shouldn’t call yourself a financial or investment adviser unless you are qualified and licensed – so the regulator believes. Fair enough. But unlike in medicine where the MBBS and MD degrees are fairly standardized and recognised as the minimum qualification, and there is a government or professional body overseeing the licensing, there is no such standardization or uniform licensing in finance.

So I have been experimenting with a few different titles…here’s why…

What do financial advisers actually do?

In simple terms, the finance industry acts as the intermediary between entrepreneurs with business ideas and savers with surplus capital for a period of time. The entrepreneurs hire investment bankers to raise capital by selling equity/debt (hence, sell side) and the savers hire investment advisers to guide them to invest by buying equities/debt (hence, buy side). The buy side started pooling small investors’ savings into trust vehicles called mutual funds, essentially ‘productising’ their skill of picking equities/debt. So the buy side now has two types of players – the manufacturers of products called the ‘asset management industry’ and the advisers who help investors with financial planning and then executing the plan by selecting appropriate investment products called the ‘wealth management industry’.

Within the asset management industry, the product manufacturers can be categorized by the asset classes they focus on or the type of customers they serve, or a combination of both. The mutual funds (MF) focus on traditional listed equities and debt, the portfolio management service (PMS) providers also focus primarily on traditional listed equities and debt but with more concentrated (hence, risky) strategies and the alternatives investment managers (AIF) focus on even riskier strategies within listed equities and debt (hedge funds), or unlisted/private assets of real estate, infrastructure, private equity and venture capital.

Within the wealth management industry, the advice providers are categorized by their ownership (banks, non-banks, IFAs), the customer segment they serve (mass, affluent/wealth, high net worth etc) and how they get paid – which is identified by the license they hold (distributors, advisers).

The wealth industry gets compared to the medicine industry all the time; the asset managers are compared to pharmaceutical manufacturers, the wealth managers to chemists and doctors. However, the comparison is not a good one because –

  • Pharma manufacturers make the medicines, chemists distribute, doctors prescribe – the jobs are clearly delineated. Broadly, asset managers are meant to create pooled funds in each asset class (doing securities selection) and wealth managers are meant to advise on asset allocation suited to clients’ specific circumstances. But the investment process is more fluid than that – asset managers create asset allocation products and wealth managers pick securities, try to time markets etc…basically do the jobs that manufacturers do. So there is significant overlap in the skill set and remit of what asset and wealth managers do.
  • Pharma companies have to conduct clinical trials to ensure the medicines actually work. Asset managers don’t have to prove that active management actually works. Sometimes it does, sometimes it doesn’t. Wealth managers don’t have to prove their advice adds value either.
  • Pharma companies have patents on the formulations. Asset managers are actually selling their skill…so they don’t, or can’t, articulate their investment philosophies and strategies as they keep changing. Now imagine how hard it is for wealth managers to select and construct portfolios of funds when the underlying fund keeps changing what they are trying to do.

Instead of comparing wealth to medicine, which is related to disease, what if we compared it to health?

What do most people do to look after their health?

People understand prevention is better than cure. They seek out advice and coaching on exercise and nutrition. It’s not like they don’t know they need to eat better or exercise more…they look for motivation, guidance and feedback…that’s what coaching is. Coaches basically help them to learn.

Not everyone can afford a personal nutritionist or trainer so they join group classes, look up content and share tips freely. Only when they have a problem, do they seek out a general physician. Who then refers them to a specialist. Sometimes, they participate in health screening camps without having any specific problematic symptoms.

I want to people to learn about personal finance. Why they need to plan, why and which products they need, how to measure and track their financial health. I also know that if I were to offer my time to individuals, those who need my advice the most won’t be able to afford it. So I offer group classes and online content. So I call myself financial coach, not financial adviser.

CFP, CFA, MBA in Finance – which qualification?

These are the most recognised qualifications in finance – and the most asked about on Quora.

  • CFP stands for Certified Financial Planner. In my view, the financial planner is like the general physician, looking at a client’s situation in a holistic manner. As a generalist, she looks at the gap between current situation and life goals, and prescribes a range of solutions covering insurance, investments, tax and estate planning.
  • CFA stands for Chartered Financial Analyst. I believe, the analyst is the investment specialist, offering to enhance returns through dynamic asset allocation, securities selection and hedging strategies. Like their counterparts in medicine, specialists work better when working with generalist financial planners.
  • MBA stands for Masters in Business Administration. These tend to be more conversant with corporate finance rather than financial planning or investments, so better suited to investment banking, advising clients on their family businesses.

(I started my career as a financial adviser, and then went on to earn the CFA charter and become an investment research and consultant. I then spent a few years learning about psychology, education and communication so that I could do a better job of translating my investment knowledge and experience into simpler language and techniques for a wider appeal. I no longer seek validation through qualifications – my satisfaction comes from feedback from real people watching my videos or attending my sessions).

AMFI’s MFD, SEBI’s RIA or PMS – which license?

In India, the wealth managers have to get one of the following licenses –

  • Mutual Fund Distribution (MFD) by passing a relatively simple exam covering basically how mutual funds work. The license is given by the Association of Mutual Funds of India (AMFI), a trade body of asset management companies. The curriculum doesn’t really cover how to select mutual funds apart from a cursory overview as that would mean understanding investments more deeply. Distributors get paid trail commissions by the AMCs, calculated as a percentage of the assets under management.
  • Registered Investment Adviser (RIA) by passing a two-level exam covering a broader range of investment topics. CFA charterholders get exemptions. Financial planners have to get this license even if they don’t get too deep into investment topics. RIAs get paid fee-for-service by investors directly. Curiously, the regulator mandates that a RIA can only advise 150 investors before setting up a corporate entity with a higher net worth. This requirement seems to push RIAs towards serving higher net worth clients if they are ambitious enough to want to make a decent living.
  • Portfolio Management Services (PMS) by setting up a corporate entity with a reasonably high net worth, lots of systems and a qualified responsible officer. The PMS is basically a managed account that sits somewhere in between manufacturing and advice; it offers model portfolios but the securities are held in investors’ names. PMS providers get paid  investment management fees, similar to what AMCs embed into their funds.

As of 1 October, the regulator has made it so onerous for wealth managers to offer advice under the RIA license that some large wealth management firms are opting out, asking their clients to migrate to distribution or managed services.

Why does the license get called ‘Registered Investment Adviser’ and the exam curriculum cover mostly investment topics? Which license should a financial planner get if she wants to advise on non-investment specific topics? Why are there insurance and retirement advisers regulated separately by other regulators with completely different standards? Do real estate and gold even have advisers or is it understood that all players in these markets are self-interested brokers? While one doesn’t expect one adviser to be across all these areas – insurance, tax, financial investments, real estate, gold – the fact is that the investor does have to make real choices amongst these.

I am slowly building up a library of content on these topics…I hope people see it as a useful resource. If someone has a suggestion for how to introduce myself, I am all ears.

Image credit – theyellowspot

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