The Securities Commission Malaysia recently asked for feedback on their proposal to allow financial planners to give investment advice on individual stocks and bonds. SC chairman Datuk Syed Zaid Albar said such an initiative will allow financial planners “to play a vital role in protecting investors against bad investment choices”.

The current role of financial planners to provide high-level advice on areas such as retirement, insurance, tax management, and estate planning is already quite comprehensive; but expanding it to stock-picking might not add extra benefits to the very people the proposal is intended  to help. 

Financial planning (and financial literacy) in the areas of investment or retirement planning is all about diversification and asset allocation. This means that the pertinent question for financial planners is how to establish efficient portfolios that optimise returns given a certain risk level. The answer to that is not necessarily adding individual stocks to portfolios, but getting exposure to global asset classes. Even a Malaysia-only portfolio raises the risk-return efficiency question of whether there’s something better out there, let alone looking narrowly at adding individual Malaysian stocks. 

The role of fund managers as well as institutional investors has been firmly established to fulfill the complexities of diversification and asset allocation. Such institutions comprise private fund managers who manage unit trust and discretionary funds, as well as public pension funds such as EPF and KWAP.  Together with strategic shareholders, they substantially control Malaysian-listed companies. This phenomenon is also true globally: for instance, institutions control 70-80% of US-listed companies.

Fund managers have allocated significant human and technical resources to strive for efficient and outperforming portfolios, with the high costs of such activity being passed on to the consumer through sales commissions and management fees. The question, then, is whether or not financial planners can or are willing to replicate the resources of institutional investors to provide efficient portfolio management. In other words, will the average financial planner be in a position to devote resources to reinvent the fund management wheel?

The impact of costs on financial planning business models is also worth considering. How much more will customers be charged for stock-picking advice? If it becomes lucrative, will financial planners focus more on stock advisory at the expense of proper financial planning? Additionally, the SC has taken great pains to warn the public against scams; so checklisting for additional conditions should be carried out to prevent get-rich schemes being unscrupulously disguised as stock advisory. Such conditions include but are not limited to research capabilities, diversification value-add, and impact to long-term goals.

Vested interests could possibly be lobbying for this proposal, which is understandable. Notably, since the 1997/98 Asian financial crisis, retail participation (i.e. individual traders who buy or sell securities for their personal accounts) on the local stock market has been dwindling to about 20% of Bursa volumes, even though it spiked up during the Covid-19 pandemic. Indeed, Bursa has been lamenting the lack of retail participation.

The lack of retail participation in the stock market is not a bad thing as it reflects the progressive intermediation and professionalisation of investment management.

However, this lack of retail participation is not a bad thing as it reflects the progressive intermediation and professionalisation of investment management. As mentioned, resource-rich fund managers can provide price discovery, diversification and prudence to retail investors whose lack of time and resources to research and monitor stocks can “zombify” their holdings. Many who don’t have the heart to sell losing stocks end up losing more while also randomly buying more stocks due to poor guidance whether from peers, the financial media or policy. 

Institutionalising our stock market will lead to the very thing that Bursa or the stockbrokers want to prevent: reduced retail trading on the stock market. Further data on this might prove instructive.   

Currently, financial planners can already fix this through recommending a switch into collective investment schemes, such as unit trust funds and ETFs. But any increase in retail participation — whether directly by the retail investor or indirectly through financial planning stock advisory — is two steps backwards because aiming for a volume ramp-up suggests short-termism, which is detrimental to portfolios with longer term horizons (e.g. retirement or children’s education).

Globally, passive investing has ballooned assets held by ETFs by seven times in the past 10 years to US$7 trillion today, as more retail and institutional investors opt for low-cost and broad market exposures. Such a beneficial trend, which hearteningly indicates better asset allocation but may conflict with a volume agenda on the local stock market, should not be ignored by regulators and advisors alike.