lecture 09

WEALTH PLANNING AND MANAGEMENT

• Lecture 09• Issues Related to Wealth Planning

• and Management

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CONTENTS

• Introduction• Users and Providers of wealth Planning

Services• Organisations and Governing Bodies• Regulatory Control• Ethics and code of Conduct• Professional Responsibility• Review Questions

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INTRODUCTION

• Wealth planning and management as a comprehensive programme is still relatively new.

• People do plan and manage their wealth in a small and ad hoc way but not in a comprehensive way.

• It used to be the High Net Worth Individuals (HNWI) who find it useful

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USERS AND PROVIDERS OF WEALTH PLANNING SERVICES

• Users of wealth planning services are normally individuals (HNWI)

• Corporations usually do it on behalf of individuals or for their clients

• Providers of wealth planning services are usually firms who can be sole proprietorships or a group of individuals or large corporations

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Users of Wealth Planningand Management Services

• Wealth planning and management services cover different needs at various stages of life. Among those needs are:– Buying of shares and stocks– Purchasing of Real Estate or cars– Income Tax– Banking services– Insurance or Takaful– Trustee services

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• Technically everyone requires some form of wealth planning and management–When someone starts to work and earn a salary

he needs to plan how to spend it so that he would have enough till the next pay day or even have something to save

–When he gets married he will need to figure out how to spend on various needs

–When he gets a child he may have to look deeper into his plans

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• When one have a bigger family or when he will be due for retirement naturally he should have planned to have enough for his retirement such that he need not change much of his lifestyle.

• For Islamic wealth planning and management the considerations are similar but the tools must be Shariah compliant. This includes wealth generation instruments as well as well protection and distribution. It should also include wealth cleansing (zakat)

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Providers of Wealth Planningand Management Services

• The providers of Islamic wealth planning and management services include:– Islamic Banks

– Conventional Banks with Islamic windows

– Insurance /Takaful Agents

– Unit Trust Agents

– Trustee Agents

– Others

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Users and Providers of Wealth Planningand Management Services

Bank

Managers

Fund

Managers

Credit

Counsellors

Stock-

brokers

Accountants Trustee Agents

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Real

Estate Agents

Tax

Consultants

Lawyers Zakat Collectors

Unit Trust Agents

Insurance/

Takaful Agents

Providers of Wealth Planning and Management Services

Wealth Planning and Management Services

Users of Wealth Planning and Management Services

ORGANISATIONS AND GOVERNING BODIES

• Financial Planning Association with 17 countries offering Certified Financial Planner (CFP) awarded by Financial Planning Standards Board (FPSB)

• FPSB founded in 1990, has 17 affiliate members who have the right to award the CFP. Malaysia is included in the 17

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• Wealth Management is relatively new and most governing bodies are in USA

• International Association of Financial Planning (IAFP) was formed in 1969 to promote wealth management, conduct educational and training programs for members and to promote ethical conduct among practitioners

• In 1998 Society of Financial Services Professional (SFSP) was formed and in 1999 the National Association of Insurance and Financial Advisers (NAIFA) was formed

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• On the education side, College of Financial Planning was formed in 1972 to provide the Certified Financial Planner (CFP) program

• The CFP award was later transferred to Certified Financial Planner Board of Standards.

• In 1973 the Institute of Certified Financial Planners was formed and later the American College created the Master of Science in Financial Services (MSFS) which later awarded the Chartered Financial Consultant (ChFC)

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• In UK the Personal Finance Society is the main organisation responsible for the financial planning industry. Together with the Chartered Insurance Institute (CII) it has decided to adopt the Chartered Financial Planner (CFP) designation as the benchmark for its members

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• In Malaysia the proper training was started in 1990’s when Malaysian Insurance Institute (MII) brought Life Underwriter Training Council (LUTC) Fellowship program to conduct a module called “Fundamentals of Financial Services”.

• Later MII brought American College’s Chartered Financial Consultant (ChFC) program into Malaysia

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• Wealth management came into Malaysia only in late 1990’s although insurance agents called themselves “financial advisors”, “financial planners” and “financial consultants”

• Later when unit trusts became popular their agents also called themselves “financial planners”.

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• On 13 December 1999 the Financial Planning Association of Malaysia (FPAM) was formed.

• The mission of FPAM was to educate the public in the process and benefits of wealth management and to raise the standards of competency and ethical practice of qualified financial planners in Malaysia

• The International Association of Registered Financial Consultants (IARFC) was established in 1984 as the International Association for Registered Financial Planners. The Malaysian Affiliate of IARFC was set up in 2001 to promote the Registered Financial Consultants (RFC) in this region.

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• The Malaysian Financial Planning Council (MFPC) was later formed which confers the Registered Fianncial Planners (RFP) designation. The initial members are the Life Insurance Association of Malaysia (LIAM), the National Association of Malaysian Life Insurance and Financial Advisors (NAMLIFA) and the Malaysian Insurance Institute (MII). Since then the MII no longer provides education and certification of the ChFC designation

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REGULATORY CONTROL

• Public confidence in wealth management depends on the soundness of financial infrastructure

• For this purpose the following are the key regulations affecting wealth planning and management industry:– Banking and Financial Institutions Act (1989)

– Islamic Banking Act (1983)

– Securities Commission Act 1993

– Securities Industry (Central Depository) Act 1983; and to some extent the Insurance Act 1996 and the Takaful Act 1984

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REGULATORY CONTROL

Ministry of Finance

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Bank Negara Malaysia Securities Commission

BAFIA Insurance Act

Takaful Act

Securities Industry Act

Futures Industry Act

BURSA MALAYSIA MESDAQ COMMEX KLOFE

SCANS

MCD

Malaysian Derivatives

Clearing House

REGULATORY CONTROL (Malaysia)

• BAFIA under Bank Negara Malaysia provides regulation for the banking and financial services industry

• BNM objectives are:– To issue currency and keep reserves to safeguard value of

currency

– To act as a banker and financial advisor to the government

– To promote monetary stability and sound financial structure

– To influence credit situation to the benefit of the country

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• With regards to the wealth planning and management industry, BNM also announced the regulatory framework for the licensing of Financial Advisors after the enactment of the Insurance (Amendment) Act 2005 (IA) and the Insurance (Amendment) Regulations 2005.

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• The Licensing Requirements for Financial Advisors (FA) are:– FA will be licensed under the Insurance Act as a new category

of intermediaries. In addition to insurance products, they can advise and market other financial products

– FA must be a body corporate with minimum paid-up capital unimpaired by losses of RM100,000 and majority Malaysian-controlled

– FA must have minimum professional indemnity insurance of RM200,000

– Licence will be renewed annually subject to compliance with licensing requirements

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• The Licensing Requirements for Financial Advisors (FA) are: (cont’d)– The FA is also subject to other requirements such as changes in

shareholding, approval for appointment of CEO and Directors, opening of branches and submission of annual returns

– Representatives of FA must be approved by BNM and have specific qualifications as required by BNM

– The use of “Financial Advisor” is restricted only to those awarded the licence

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REGULATORY CONTROL (Singapore)

• In Singapore, the sole governing body regulating the wealth planning and management industry is the Monetary Authority of Singapore (MAS)

• Established in 1971 under the Monetary Authority of Singapore Act 1970, it is the sole authority to regulate all elements of monetary, banking and financial aspects in Singapore.

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• MAS is given powers to act as banker to and financial agent of the Government. It is to promote monetary stability and formulate credit and exchange policies conducive to Singapore’s economic growth

• In April 1977 it took over the regulation of the insurance industry and in 1984 the Securities Industry Act (1973)

• MAS now administers the various statutes relating to money, banking, insurance, securities and the financial sector in general. Following the merger with Board of Commissioners of Currency on 1st October 2002 it now assumes the function of currency issuance.

• Financial Advisors’ Act provides for the regulation of the wealth planning and management industry in Singapore

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• Basically MAS’s objectives are:– To conduct monetary policy and issue currency,

and to manage the official foreign reserves and the issuance of government securities;

– To supervise the banking, insurance, securities and futures industries, and develop strategies in partnership with the private sector to promote Singapore as an international financial centre; and

– To build a cohesive and integrated organisation of excellence

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REGULATORY CONTROL(United Kingdom)

• In UK, the Financial Services and Markets Act 2000 provides for the regulation of the wealth planning and management industry through the Financial Services Authority (FSA).

• The FSA is an independent non-governmental body, a company limited by guarantee and financed by the financial services industry.

• The Treasury appoints the FSA Board

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REGULATORY CONTROL(United Kingdom)

• The four main objectives of FSA are:–Maintaining confidence in the financial system;

– Promoting public understanding of the financial system;

– Securing the appropriate degree of protection for consumers; and

– Reducing the extent to which it is possible for a business to be used for a purpose conneced with financial crime.

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ETHICS AND CODE OF CONDUCT

• In order to ensure that the wealth planning and management industry is professionally run, it was decided to adopt a code of conduct

• Two of the most comprehensive codes of conduct are the ones adopted by Financial Planning Association of Malaysia (FPAM) [CFP Code of Ethics and Professional Responsibility] and Society of Financial Services Professionals (SFSP) [Code of Professional Responsibility]

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CFP Code of Ethics andProfessional Responsibility

• There are 7 principles contained in the CFP Cod of Ethics, namely:

1. Integrity2. Objectivity3. Competence4. Fairness5. Confidentiality6. Professionalism7. Diligence

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SFSP code of Professional Responsibility

• SFSP code of Professional Responsibility consists of:1. Fairness

2. Competence

3. Confidentiality

4. Integrity

5. Diligence

6. Professionalism

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Islamic Ethics and Code of Conduct

• These are from the two main sources of Islamic teachings: the Quran and the Prophetic Traditions– Knowledgeable

– Sincerity

– Truthfulness

– Trustworthiness

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PROFESSIONAL RESPONSIBILITY

• The word “professional” has been used in many different ways– Professional athlete, golfer, wrestler may denote

one who is skilled and get paid for what he is doing

– A professional makes a living out of playing golf for example

– Some occupations are considered as professions: doctors, engineers, lawyers, architects, etc

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• What the professionals have in common are – Job skills and devotion

– Reliability

– Dedication

– Thoroughness

– Dependability

– A commitment to providing good service as well as the awareness that his quality of service affects the reputation of others in the same profession

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LEHMAN BROS AND BEAR STEARNS

EXECUTIVES MADE DELIBERATE DECISIONS TO PURSUE AGGRESSIVE INVESTMENT STRATEGY

TAKE ON GREATER RISK INCREASE LEVERAGE

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LEHMAN BROS AND BEAR STEARNS –WHY?

• FLAWED INCENTIVES AND EXECUTIVE PAY STRUCTURE– TOP EXECUTIVE REGULARLY CASHED OUT THEIR EQUITY BEFORE STOCK PRICE OF

THEIR FIRM PLUMMTED (USD1.1B TO USD 859MIL)– PAY ARRANGEMENTS DID ONT CONTAIN ANY ‘CLAW BACK’ PROVISIONS WHICH WILL

ENABLE TO RECOUP THE BONUSES THAT HAD ALREADY BEEN PAID– PERFORMANCE-BASED COMPENSATION KEPT THE EXECUTIVES IN PISITIVE TERRITORY

THE AGGRESSIVE RISK TAKING AT LEHMAN, BEAR STEARNS AND OTHER AS A RESULT OF FLAWED INCENTIVES.

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LEHMAN BROS AND BEAR STEARNS –WHY?

THE AGGRESSIVE RISK TAKING AT LEHMAN, BEAR STEARNS AND OTHER AS A RESULT OF FLAWED INCENTIVES. ABILITY TO CLAIM LARGE AMOUNT OF COMPENSATION BASED ON SHORT TERM

REESULTS HAD INDUCED THEM TO TAKE EXCESSIVE LEVEL OF RISKS.

PROBABLE REMEDIES REFORM COMPENSATION STRUCTURES TO ENSURE TIGHTER ALIGNMENT BETWEEN

EXECUTIVES PAYOFFS AND LONG TERM RESULTS EQUITY INCENTIVES SHOULD BE SUBJECT TO SUBSTANTIAL LIMITATIONS AIMED AT

PREVENTING EXECUTIVES FROM PLACING EXCESSIVE WEIGHT ON THEIR FRIM’S SHORT TERM STOCK PRICES

ENHANCING THE VALUE OF COMPANIES AND E=THE WEALTH OF SHAREHOLDERS

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• A wealth planning and management professional, Burke Christenses, JD, CLU, a former vice president of the SFSP suggested that “A professional is a person engaged in a field that requires:

1. Specialized knowledge not generally understood by the public

2. A threshold entrance requirement3. A Sense of altruism, and4. A code of ethics”

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REVIEW QUESTIONS

1. Describe the users and providers of wealth planning services

2.What in your opinion is the most important function of governing bodies in the wealth management industry?

3.Is there really a need for regulatory control when you find that the banking and other financial sector has gone into deregulation instead?

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REVIEW QUESTIONS

4. Why do you think ethics and the code of conduct is considered essential in the wealth planning and management industry?

5. Do you agree with Burke Christensen’s suggestion on “Professionalism” and why?

6. Discuss the concept of siddiq and amanah in the context of Islamic wealth planning

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