Cover Story: Evolve To Thrive

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on June 5, 2017 - June 11, 2017.
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The current model used by the unit trust industry is no longer sustainable, according to Financial Planning Association of Malaysia president Ismitz Matthew De Alwis. He says asset management firms need to adopt a multi-product strategy to tackle the myriad threats and issues facing the industry.

 

The practice of pushing unit trust products based purely on expected returns will not be sustainable for the industry. Instead, investment products must be offered based on holistic portfolio planning, says Ismitz Matthew De Alwis, president of the Financial Planning Association of Malaysia (FPAM).

“I do not doubt that the ‘single product’ model can still work in the next two to three years. But if things do not change and we continue to rely on front-end loading and charges to survive, it will be like running on a treadmill. It is not good for the clients and also the business at the sustainability compliance level,” he says.

This single-product model has seen some unit trust agents sell funds by emphasising the returns of the product, and not whether the product is suitable for the client. Unit trust agents earn an upfront fee of 3% to 5% of the total amount invested by their clients while asset management firms charge an annual management fee of 1% to 2% on the sum invested.

This approach to selling unit trust funds focuses on the sale of the product rather than on meeting the clients’ real financial needs. It has led to mis-selling and churning (the overselling of products to earn more upfront fees), which impact the reputation of the industry as a whole.

“It is no secret in the industry. We have tried to stem such practices, but were unable to determine which part of our revenue is due to churning and which is not. It has always been like that with the current business model and we need to put an end to that [churning],” says De Alwis, who is CEO of Kenanga Investors Bhd.

For the industry to move forward, there must be a mindset shift, from pushing only unit trust products to offering multiple financial products that cater for the real needs of clients, he says. These financial products include savings and protection plans, tax advice, estate planning and will writing services. The agents can also provide more independent financial advice that caters for the needs of their clients. 

De Alwis illustrates this scenario. “Let’s say you receive a call from someone trying to sell an investment product and he says, ‘Would you be interested in any investment products at this stage? Would you want to buy our product? It is one of the top performers and has generated good returns in the past.’

“On the other hand, someone who provides financial advice may say, ‘Hello sir, can I buy you a cup of coffee while I provide you with a free financial health check? We can meet up anytime you are free. We can have a chat and find out your financial needs.’

“The former tends to make you uncomfortable as he is pushing products. The latter, however, focuses on your real financial needs.” 

He says asset management firms can help raise public awareness on financial education by moving from the single-product model to multiple financial products based on the recommendation of certified financial planners. This way, the public will be able to learn about planning their financial map and gain knowledge of the different investment products and asset classes in the process.

To facilitate this, asset management firms could establish their own financial planning platform to provide the infrastructure and tools for people who want to become financial planners but lack the funds to kick-start their careers, says De Alwis.

“The financial planning industry has not advanced as fast as expected, partly because many of us did not have the housing [referring to the platform] to support financial planners. These people may not have the necessary funds and tools to set up their own practice, but they can look for such platforms. They can still be independent and we are more than happy to help them,” he says.  

De Alwis says Kenanga is actively encouraging its agency force to apply for the Certified Financial Planner licence. It has also established the KenWealth platform and tied up with 20 reputable product partners to offer clients investment, life and general insurance, treasury deposit and will and trust products.

“We are training our people to create a mindset shift so that they are able to give good financial advice to clients and come up with a portfolio for them. Then, maybe, they will buy into our Kenanga Growth fund, which is one of the top-performing local equity funds, as one of their core funds. And based on their needs, we would be able to recommend a satellite fund, which could be a bond fund offered by another firm,” says De Alwis. 

To be sustainable, fund management companies should start referring to their assets as “assets under advice” rather than assets under management (AUM), he says. This could help mitigate issues related to mis-selling and enable the industry to sustain itself going forward.

“We have always used AUM in the industry [as a metric]. But I would rather use the term ‘assets under advice’ (AUA), which means the total wealth of the clients you are advising,” says De Alwis.

“AUM only takes into account the money investors put into unit trust funds. AUA can include other portions of their money such as insurance and other assets involved in estate planning, for which we can offer them advice as well. 

“Instead of charging an upfront fee, we could charge an annual fee for providing them financial planning on all these aspects. It could mitigate issues related to mis-selling and make the business more sustainable.”

The future of the industry

Another reason why asset management firms will no longer be able to survive solely on upfront fees is due to the proliferation of financial technology (fintech) platforms. The widespread use of fintech has lowered barriers to investment and caused fees to come down in developed markets such as the US and Europe. 

De Alwis says this trend is also seen in emerging markets, including Malaysia. “When I took the helm [at FPAM] in August last year, things suddenly started to change very fast because of technology. Fintech has become a buzzword in town and the asset management industry.”

The Securities Commission Malaysia (SC) has also come out with frameworks to allow fintech to bring positive changes to the financial industry and investment community, which will stimulate further growth in fintech-related investments. 

In April last year, the regulator introduced the peer-to-peer (P2P) lending framework, which allows investors to participate in debt financing for small and medium enterprises (SMEs) for as little as RM100. In Malaysia, there are currently six licensed P2P platform operators. 

Last month, the SC introduced the Digital Investment Management framework, which sets out licensing and conduct requirements for the offering of “automated discretionary portfolio management services” (also known as robo-advisory services) to investors. All these changes brought about by technology could render the single-product model of some asset management firms irrelevant in the future, says De Alwis.

Meanwhile, the financial needs of the growing middle and upper-middle class are getting more complex. “These people are professionals who have accumulated some wealth. While they are wealthier than some people, they are not as rich as the high-net-worth or ultra-high-net-worth individuals. They have day-to-day concerns like any man in the street. They have mortgages, children’s education and retirement to take care of. They need proper financial advice on things like savings, protection plans, investment products and taxes,” he says.

“Also, this segment is younger. They are getting more sophisticated, more informed and are aware of how fees are charged. Asset management firms have to change their ways to capture this segment of the market.” 

Challenges ahead

However, as much as De Alwis wants to foster change in the industry, it is not an easy journey. This is partly due to some industry players’ fear of losing business. 

“Some players in the industry have expressed their concerns that the multi-product approach could erode their business. But from the perspective of the FPAM president, I say look, we must grow the market together.”

Instead of seeing this as competition, industry players should see it as a concerted effort to improve the industry as a whole and grow the market further, which could benefit all, especially since the emerging affluent market is growing and remains underserved, says De Alwis. 

“If you look at it from a company’s point of view, you would think that we are all fighting for the same slice of cake. But the question should be: how can we increase the 1kg cake to 3kg together? Because ultimately, we grow together as an industry.”

However, even as the industry moves from the single-product model to the multi-product approach, it does not take away the fact that the performance of the funds provided by asset management firms continue to be the key factor in attracting investors. 

For now, not all asset management firms will move in this direction as it depends on their business model and strategy, says De Alwis. But he is positive that the industry will gradually change with the conscious efforts of the board members of the FPAM.

“Not all firms will follow this path for now. But I am happy to say that we have a very good mix in the association. For instance, two representatives on our board come from the two largest banks in the country — Maybank and CIMB. And they hold senior positions,” he says.

“At the same time, we have a person on the board who believes in technology and low fees. We also have practitioners and people from the education and other sectors. We even have members from the insurance industry. We are quite diverse and some of our business models are really pushing us in the direction we want.” 

Meanwhile, there are challenges two fronts, says De Alwis. On the regulatory front, he says the distribution force of asset management firms have found it hard to acquire the licences to distribute multiple financial products. 

“All these licences come under various regulatory jurisdictions. Earlier on, when everybody was operating under the single-product model, it was not an issue. But now, we are building a financial planning platform where they are allowed to represent clients and refer them to multiple products.”

The FPAM is engaging the regulators to find a solution to this problem.

On the industry front, De Alwis wants to engage with and bring together all the other financial planning associations so that they can promote and grow the industry with one voice. “We do not want the industry to be fragmented, which could weaken our strength. Instead of having several associations with different objectives, we will try to make it more coordinated. More importantly, financial planners and investors will not get confused about whom they should approach when they have questions in mind,” he says.

 

Financial literacy programmes could help stem money games

Ismitz Matthew De Alwis, president of the Financial Planning Association of Malaysia (FPAM), says the low financial literacy among Malaysians has partly contributed to the popularity of money games. “Financial literacy has not grown as fast as our country has.”

He says this can be seen in recent reports that millennials have been chalking up debt while the older generation does not have enough savings for retirement. These, coupled with the high inflationary environment, have contributed to an increase in dubious investment schemes.

“A lot of these have to do with the inflationary environment and low barriers to entry. People say they need to survive. But I call it greed as they are putting in too much money. At the end of the day, it is all about financial literacy,” says De Alwis.


FPAM to introduce mobile app

Linnet Lee (picture), CEO of the Financial Planning Association of Malaysia (FPAM), says the association will introduce its mobile application in the third quarter of this year. The app, called MySmartFinance, will serve as a tool to educate investors on financial planning by providing them with independent information posted by government-linked agencies.

The app will also link users to financial planners, including independent financial planners and agents with asset management firms, who have acquired the Certified Financial Planner licence.

“Once you log onto the app, it will guide you through the financial planning process, which starts from basic and goes on to intermediate and advanced levels. After you have gone through it, you are equipped with basic knowledge and may want to engage a financial planner. By then, the app will ask for your permission to link you to the websites of product or service providers,” says Lee.

“We have also gamified the process. Users will get points after passing each stage of the process. These points could be used as a discount when they pay for products and services later via the app.” 

Lee says the app will also allow FPAM to reach out to a wider audience via the internet and smartphones. It could also provide user feedback on what the public is interested in.

“Not only people in the city but also those in remote places will be able to receive financial education via the app without our having to pay extra to go to them. We will have better reach and the data we gather will show us what the public really needs,” she says. 

Lee says FPAM is emphasising the importance of the internet and technology to its members. “We do groom our financial planners to be prepared for technology. We have courses for them so that they are aware that technology can be a part of their tools and improve their work.”

When asked whether financial planners will recommend newer types of investment products such as equity crowdfunding and peer-to-peer financing to their clients, FPAM president Ismitz Matthew De Alwis says the members will keep their clients informed.

“We will have our people looking into them when they become more stable and accepted. For now, we encourage our members to attend social media talks to learn how to market their services in the digital space and how to comply with the existing rules when promoting their services through social media,” he adds.

Should financial planners be afraid of the wave of technology such as the introduction of robo-advisers in Malaysia? Lee does not think so.  

“Robo-adviser is a very broad term. Instead of a robo-adviser that helps people construct an investment portfolio online, it could be a tool used by our members to key in client information and make calculations,” she says.

“This could help financial planners save time and focus more on the conversation with their clients. They could also meet more clients within a certain period of time.”

De Alwis believes that robo-advisers are not competing with financial planners for the same market as they only cater for the basic needs of the younger generation. “The robo-adviser may ask you some questions. But it will not ask what your debt level is or what your cash flow looks like. It may not ask for your monthly mortgage or credit card payment. It is very investment-focused,” he says.