Marzunisham Omar: Financial advisers, trusted advisers
Keynote address by Mr Marzunisham Omar, Assistant Governor of the Central Bank of Malaysia
(Bank Negara Malaysia), at the 6th Annual Conference of the Association of Financial Advisers
2017 "Financial Advisers, Trusted Advisers", Kuala Lumpur, 9 October 2017.
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It is indeed a great pleasure to be here this morning. I would like to thank the Association of
Financial Advisers for inviting me to speak, and allow me first to congratulate the team on the
successful organisation of this year's conference.
The future is as promising as it is unpredictable. As I reflect on the theme of the Conference, I
am reminded of a quote from Confucius, the ancient Chinese philosopher - "I used to take on
trust a man's deeds, after having listened to his words. Now, having listened to a man's words, I
go on to observe his deeds."
This morning I would like to talk about trust - financial advisers as trusted advisers. Indeed, trust
is at the heart of the financial advisory industry. While customer service and technology are
increasingly the key differentiators, the most essential element has been, and will always be,
trust. In an industry where the very foundations are dependent on the strength of personal
relationships, trust is not only a necessary feature - it is its strongest advantage, its defining
value proposition.
Therefore, in my view, trust is where the future is - the financial adviser of the future will be a
trusted adviser - one that customers can depend on for reliable, thoughtful and bespoke advice
without hesitation.
Confidence and trust in the industry has unfortunately been bruised in recent years. Instances of
mis-selling and fraudulent practices have adversely affected the industry's reputation. The rising
occurrence of illegal financial schemes in recent times has further worsened the public's
perception towards individuals who call themselves "financial experts". Most financial advisers
have done the right thing, only a small minority has not. Yet, it is this minority that has been
enough to trigger a tipping point of bad publicity for the profession.
Under these circumstances, trust becomes the ultimate currency of trade. Trust entails
adherence to high ethical standards, putting the interests of customers first and treating them
fairly. It comes down to the profession having a genuine concern for customers' long-term
financial needs. As trusted advisers, your responsibilities extend beyond just advising customers
on how to invest their money. Rather, it is about helping them achieving their financial goals,
building their financial standing, and securing a promising future for them and their children.
Indeed, this is in line with the philosophy of the Association of Financial Advisers. It is imperative
that your actions reflect these values. Indeed, as Confucius reminds us, it is the deeds that will
prove critical in building the long lasting, reliable relationships that will take this profession to
greater heights.
To many, financial planning can be a fairly complicated task. Identifying personal financial needs
requires consideration of an impossibly wide array of factors, finding the right solutions for them
even more so. For years, financial advisers have played the crucial role of condensing the vast
technical complexities of finance into practical, reliable advice on a personal level. It is a role
whose prominence I am certain can only grow with time, but only if it successfully adapts to a
rapidly transforming financial and social landscape.
In this connection and before elaborating further on the concept of a trust, I would like to draw
your attention to three major trends that are shaping the industry as we speak.
First, demographic shifts. Malaysia is a relatively young nation. 40-50% of our workforce are
aged between 21 to 35, also known as Gen Y. This remains a largely untapped market for
financial advisory services, and for a reason - many individuals within this age group are
skeptical of, or distrust financial advisers. According to a survey by the Asian Institute of Finance
in 2015, only 37% of these individuals had sought advice from a financial adviser. Of this, only
26% trusted the advice they received. This is complicated by the fact that these are highly
connected, tech-savvy individuals with broad access to online platforms that act as a primary
source of information and advice. Earning the trust of the Gen Y market, and offering them a
unique product or service, will no doubt be the biggest and most important challenge for the
financial advisory profession of today if it is to remain relevant tomorrow.
This leads me to the second major challenge facing the industry, that is the digital revolution.
Less than a decade ago, digital investment platforms and robo-advisors were barely heard of.
Today, they form a booming global industry, with a projected asset growth worldwide of 68% by
2020 - amounting to USD2.2 trillion. Recently, a private wealth management company based in
Labuan launched the first ever Shariah-compliant robo-advisor in Asia. Fueled by technological
advancements, robo-advisors are capable of completing tasks such as fact-finding and
calculation of risk profiles much quicker and at a much cheaper cost.
Third, increasing financial complexity. Over the years, financial institutions have introduced many
innovative products to serve various needs and risk appetites. Yet, a nation-wide survey
commissioned by Bank Negara Malaysia reveals that financial literacy remains relatively low in
Malaysia. Even the most sophisticated consumers suffer from "choice fatigue" from the vast
array of financial products that are available in the market. An opportunity thus exists for financial
advisers to help consumers address these challenges by conceptualizing and packaging
recommendations in a manner that would be at once holistic and digestible.
With a new paradigm looming on the horizon, financial advisors must reinvent through innovative
business models, new delivery channels, and an openness to continuous learning. The final
destination of these transformative efforts, however, will always remain the same - the building,
preserving and strengthening of trust between adviser and consumer.
That said, I would next like to share and elaborate on what I believe are three core features of a
trusted adviser - professionalism, independence and adaptability.
Elevating professionalism
Professionalism is first and foremost about being customer-centric. Nurturing strong
relationships with customers is key. Technology can be leveraged. Digital interfaces can help
provide a more seamless customer experience. Big data may yield insights for anticipating
customer needs. However, technology is ultimately only an enabler. It should seek to amplify the
human touch, not diminish it. In the business of trust, no algorithm can replace a smile, a
handshake or a chat over coffee.
Professionalism is also about competence. Being qualified is a starting point. But to remain
relevant, it is important that financial advisers continuously strive to keep up with the latest
developments. In this regard, continuous professional development is critical. Learning events
such as today's conference are certainly useful and I would like to congratulate the Association
for organizing these learning events.
In addition, professionalism is about character - it embodies the highest standards of integrity,
ethics and responsible conduct. This is what I believe differentiates a trusted adviser from a
merely reliable one. One way of achieving this is by holding financial advisers accountable to a
strong code of ethics. In this regard, it is heartening to note that the Association already requires
its members to abide by the code of ethics for the financial sector issued by the Financial
Services Professional Board. Going forward, the Association may consider refining this code of
ethics to better reflect the specificities of the financial advisory industry. For improved efficacy,
the code should also be complemented, if I may suggest, by rigorous monitoring and strong
enforcement. To this end, I would like to suggest the Association spearhead the development of
an oversight programme aimed at identifying and responding to misconduct risks in a timely
manner. Perspectives from members could contribute towards crafting more creative, practical
and effective monitoring mechanisms, such as members' compliance report cards.
To further elevate the professionalism of financial advisers, Bank Negara Malaysia is currently
reviewing the fit and proper requirements. These requirements will specify, among others, the
factors to be observed in the assessment and appointment of key responsible persons, such as
members of the Board and CEOs of the financial advisers, and financial advisers'
representatives. Adoption of these standards we hope will help to strengthen the credibility of the
profession.
Another aspect that is closely linked to professionalism is transparency. It is for this reason that
the Bank has introduced additional disclosure requirements through the LIFE framework. These
disclosures are intended to ensure that appropriate and fair advice is given to consumers who
purchase insurance. Mandatory sales illustrations have also been enhanced. Additionally, all
intermediaries now have to provide a service guide to help insurance buyers better understand
the advice and services to which they are entitled. Instead of viewing these as requirements to be
complied with, I would like to encourage financial advisers to take advantage of these disclosure
tools to help customers fully understand what they are paying for. This will go a long way in
establishing yourselves as trusted advisers.
Upholding independence
The second feature of a trusted adviser is independence. When consumers seek financial
advice, they expect to get an objective point of view that places their best interest above all else.
And rightly so - the individual's hard-earned savings are at stake. Yet, the reality today is that the
practice of commission-based compensation for financial advisers may not be fully aligned with
the principle of rewarding quality advice to customers.
Certainly, commission-based compensation has its advantages. It is effective in ensuring that
products are actually bought. It is also appealing to consumers who may not be able to afford to
pay for advice. But there is a world of difference between sales and advisory. While sales seeks
to maximise transaction volume, advisory seeks to maximise the consumer's welfare. With the
prevalent practice of commission-based compensation, it is not surprising that the industry is still
often perceived as one that pushes products, rather than provide solutions.
The introduction of the balanced scorecard, which is currently being piloted among financial
advisers, is to help address this perception. With the scorecard, remuneration of intermediaries
will be more closely aligned to the suitability of products for prospective customers and the
overall quality of service. I believe that such a shift in incentive structures will encourage advisers
to build more enduring relationships with customers.
More can be done beyond the realm of regulation. In other countries - such as Australia, United
Kingdom and India - financial advisers are voluntarily adopting a fee-based model. The combined
effect of increased customer awareness and bargaining power are also pushing financial
advisers to reduce their commission-based income. In India for example, several firms have
successfully shifted to largely fee-based models. This is, however, not a painless transition. In
doing so, some have parted ways with customers who were unwilling to pay these fees.
I believe that the move towards a fee-based model is an important signal that the advisers'
incentives are aligned with those of their customers. To ensure a successful transition to a
feebased model, financial advisers will need to enhance their value proposition to ensure that
customers receive the standard and breadth of advisory services that would be worth paying for.
This is no easy undertaking, but I am confident that it is one that our financial advisory firms will
be able to achieve.
Adaptability to change
At the beginning of my remarks, I had highlighted three key trends affecting the industry. How well
financial advisers respond to these developments will determine the industry's relevance in the
years to come. This brings me to the third feature of a trusted financial adviser - the adaptability
to change.
Traditionally, financial advisers have been a staple for high net-worth individuals. Gen Ys have
rarely been reached, reinforcing the unfortunate perception that financial advisory services are an
"outdated" concept, or simply not for younger generation. This must change going forward, as
this generation represents a large untapped market for financial advisers, and will continue to
grow in importance as their wealth increases over time.
Whether financial advisers adapt successfully in reaching out to Gen Ys depends on their ability
to understand the unique characteristics of this demographic. Gen Ys actively compare products
using a wide range of information, such as online research, social media and peer reviews. They
are also accustomed to services being convenient, real-time and on-demand. Within the context
of financial advisory, engaging Gen Ys may also have a specific challenge - that is, planning for
long-term goals such as retirement or wealth accumulation may take a back seat to more
immediate needs.
To meet these demands, financial advisers must be flexible enough to employ a range of
engagement methods. For example, financial advisers should take advantage of social media
platforms as part of their marketing strategies.
Financial advisers could also leverage on interactive online platforms to better engage with Gen
Ys. Recently, tech start-ups are launching applications to match consumers seeking financial
advice to financial advisers seeking customers. These applications are using a "matchmaking
concept" to link customers to trustworthy financial advisers, based on their unique investing
needs and personality.
In addition, different pricing strategies could also be explored. These should be commensurate
with the profile of a prospective Gen Y customer. For example, fees can be adjusted in proportion
to a younger customer's income level, rather than linked to assets under management, as is
typically the case now. Flat fees or hourly charges may also be considered for customers with
smaller account balances.
Conclusion
I have spoken at length about the key tenets of a trusted adviser today, but I also understand that
transforming the profession into where it needs to be in the future is not something that can
happen overnight. Like any other transformation, the effort will require meticulous planning,
strategy and sheer determination through the many changes to come. Professionalism,
independence and adaptability will all be hard-won victories. While Bank Negara Malaysia stands
ready to support initiatives in this direction, it is the industry that must ultimately collaborate to
create the business models and value propositions that will define the financial advisory services
of the future. The Association serves as an excellent platform for such collaboration, with the
potential participation of 618 registered financial advisers' representatives to date. I welcome the
innovations that are to come from the Association and the members.
I began today's speech with Confucius, and I'd like to close with another pearl of wisdom from his
analects - "The man who moves a mountain begins by carrying away small stones." As today's
theme suggests, our work for the future begins now. This includes resource training,
accreditation, recruitment strategies, designing new business models and forging relationships
with a new generation of consumers. Indeed, the trusted financial advisers of tomorrow are
closer than we think. In fact, I honestly believe the trusted advisers of the future are already
amongst us here today.
With that, I wish all of you a fruitful and engaging conference ahead. Terima kasih.