Monday 24 March 2014

'Investment Advisors must attach priority to customer needs'

Opening remarks by Securities and Exchange Commission (SEC) Chairman Dr Nalaka Godahewa at the Colombo Stock Brokers Association (CSBA) workshop for Investment Advisors on 22nd March 2013 at Excel World

Being the regulator, I get the opportunity to meet the CEOs of the stock brokering companies quite often. I speak to them at our regular industry consultative meetings and various other forums. But this is the first time I am addressinga large number ofinvestment advisors, the real front liners of our industry. I am glad that I got this opportunity thanks to CSBA who organized this workshop fulfilling an urgent training requirement of the investment advisor community.

You may agree with me that we are living in one of the most exiting periods of the history of our country. After 30 years of conflict, Sri Lanka has finally achieved lasting peace. We have a politically stable government which has declared economic development as its highest priority. Huge investments are being made in the infrastructure development projects such as ports, airports, irrigation systems, power plants and highways. The Government has set some ambitious growth targets for the economy. All economic indicators are currently showing steady progress.

I believe that as investment advisors, you are lucky to be in the right place at the right time. We all know that the capital market is a vital contributor to any fast developing economy. It is the main channel through which the savings and funds available with retail and institutional investors are mobilized for long-term capital formation. Even though our current market capitalization is only about 30% of the GDP, the capital market is destined to play a significant role shaping the future of our economy.Hence it is important for you also to understand the important role that you are expected to play in the overall economic development agenda of the country.


I don’t know how many of you remember that, just 5 years ago about this time in March 2009, we were still at war with the terrorists. Country was not yet a safe place for living.Suicide bomb attacks were possible anywhere anytime. LTTE planes were haunting the night skies keeping us awake. Economy was taking a beating due to heavy war expenditure.The stock market was stagnant. All Share Price Index was as low as 1400. 

Inflation was in double digits. Interest rates were so high that there was no justifiable reason for investors to consider the capital market as an investment alternative.

But 5 years later, the situation is vastly different today. We know that the war is over for good. The macro economic outlook of Sri Lanka is more promising than most of the other emerging markets. We are bombarded with foreign investors seeking business opportunities. Tourism is booming. Economy is expected to grow at about 7-8% rate for the next few years and reach USD 100bn by 2016. Inflation is now in mid single digit. Interest rates are all time low making the capital market an attractive investment alternative to traditional savings methods.

In most of the regional countries the market capitalization is as high as 70% of the GDP. It’s a known fact that in any country when the macro economy grows the Capital Market follows suit. Therefore using conservative estimates we also can expect the market value to reach at least USD 50 bn within about 4 years from now, if not earlier.

This is the environment within which you operate. As an investment advisor you need to ask yourself a key question. Has the market really lived up to its potential? If not why ? What are you doing about it as a key industry stakeholder?

Market capitalization 10 years ago was only 1/3 rd of today’s value. So market has grown. Average daily turnover has more or less doubled during this period. But do we see a tangible change in the market dynamics? Whilst turnover has grown the equation of average daily turnover to Market CAP is only 0.03. This value is inadequate when compared to most of our regional counterparts.

So what is the issue here? Is it internal or external?

When foreign investors look at CSE today what do they see? They see an opportunity in an undervalued market. Market Cap to GDP of 30 % means there is a lot of potential for this market to grow. The forward P/E is only 11.7 times. It is lower than most other global markets so it’s the right time to buy. Sri Lanka’s economy is on a growth path and the listed companies in most industries are likely to do well. CSE has a little correlation to other global markets so investing in Sri Lanka is an opportunity for fund managers to diversify their risks.

That probably is why foreign buyers contributed almost 40% of last year’s trading activities. This also means that our local investors are not exploiting the opportunity yet.

Let’s look at what regulator has done over the last few years. In 2012 the SEC in its dual capacity as Capital Market ‘Regulator and Developer’ in consultation with industry stakeholders launched a number of initiatives aimed at structurally and functionally upgrading the market. These include;

* Initiatives to develop the market infrastructure

* Initiatives increase investor education

* Initiatives to strengthen regulatory framework

* Initiatives to attract foreign funds through offshore promotions

* Initiatives to encourage more listings in the stock market

* Initiatives to promote the corporate debt market

* Initiatives enhance product portfolio

* Initiatives to increase market liquidity

* Initiatives to protect minority shareholder interests.

* Initiatives to take action against errant directors who seem to be misappropriating funds of listed companies

So one can safely say that the regulator has done more than our share of duty.

We also kept a constant dialog with the industry stakeholders consulting them regularly so that we were fully aware of the industry expectations. Basically almost everything that industry asked for we have given. I am sure that the senior industry representatives here would agree with me.

Now the question is have you done you part? Have you made an extra effort to reach out to the potential customers? Have you approached marketing in a structured manner? Have you identified different customer segments that you can target? Have you communicated with them the benefits of investing in the capital market? Have you explained to them that this probably is the best time to start investing in the capital market? Or are you just waiting till a potential customer calls you and business comes to you?

I once worked in the insurance industry for about 5 years. I was the Managing Director of Sri Lanka Insurance until 2010. I would like you to take a look at how insurance industry professionals promote their businesses. Take the case of a life insurance advisor. He or she is promoting a product where the customer has to die first to benefit from the product purchased. Other option for the customer is to wait till he or she gets really old so that the policy will mature. Yet, the life insurance advisors are promoting their products quite successfully. They try hard. They don’t quit easily. Have you heard that winners never quit and quitters never win? Are you making a similar effort to promote your products? Have you lived up to your true potential?

Of course as an investment advisor you must always be conscious of your professional, ethical and moral responsibilities. It is not about salesmanship but about true partnership. You are the wealth planner of your client. You must be honest with your client and provide him or her right advice. It’s not about making a commission from a trade or two. 

It’s about how both you and your client can win in the long run. Remember attracting customers is the easy part. Retaining them is the difficult part. To retain the customer you must understand the customer and serve his needs well. Why is he investing? May be he is trying to earn some money to buy a house. May be to finance his child’s education. May be he needs money for his daughters wedding in a few years time. May be he is funding his current investment using borrowed funds. So don’t let him down. He depends on you to give him the right advice; of course to the best of your ability.

Some people tell me market is still not active. I ask you whose job is it to get the market activated. I showed you that macro economic fundamentals are positive. The Regulators have done their part. Now it is time for you also to do your part.

Let me tell you a small story before I wind up. There was this slipper manufacturing company seeking overseas business opportunities. So they sent a salesman to evaluate market opportunities in a remote Island. The first salesman retuned and submitted a report saying "I see no potential there as no one in that country is wearing slippers". The company sent a second salesman to confirm the observation. But he retuned with a different report which said "There is a superb market potential in that country as no one is wearing slippers".

What is the moral of the story? Beauty is in the eyes of the beholder. One has to be of positive frame of mind to see the potential in a market. CSE is a classic example. Isn’t an undervalued market a better opportunity than a high valued one?

What you need today is determination. They say necessity is the mother of invention. Look after your existing customers. Reach out and look for new customers. Educate potential customers about the opportunities in an undervalued market in a low interest regime. Show them the long term benefits they can gain by investing now. Guide them wisely. When your customers do well you will also do well. When you do well market also will do well.

Success is a journey and not a destination. So take control of your destiny.
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