Trained investment advisors should guide investors in stock market
Saturday, 18 April 2009
A. F. M. Mainul Ahsan
DEMONSTRATION at Dhaka Stock Exchange (DSE) is becoming an "every week phenomenon". Whenever there is a bearish trend in the market, investors initiate procession or chant slogan in front of the DSE. Our investors are not ready yet to accept a bearish or declining market. It looks like a demonstration has become a part of our national characteristics -- whenever something goes against out interest, we chant slogans or start rally. An investor should always be ready for any market situation, and should invest accordingly. An investor needs to remember that a bad decision will lead to damage of his life-time savings. But how can a small investor -- who knows nothing about stock market -- will be able to take wise investment decisions at the DSE? Don't they need to take advice from well-trained professional investment advisors? In Bangladesh, we don't have trained professional investment advisors to guide small investors about investing in the stock market.
Last summer this writer went to visit his ancestral home in a small union in Lakshmipur district. He was surprised to see that even small business-owners and students are involved in investing in the share market. Those investors already made some quick money through IPOs and thought that investing in the stock market is an easy way to make money. Or they tried to guess short term market movement and paid the price for their mistake. Though one can't predict the short-term movements of the stock market, what is likely is that the market will move higher, perhaps substantially, in the long-run. Moreover, initial public offering (IPO) through lottery provided them some quick money which will be no longer a reality because introduction of the new book building technique. That means investors have to find some good deal in the secondary market which demand depth knowledge in finance and also patience.
However, our investors are mainly concerned about finding some trends in the market, i.e. technical analysis, rather than knowing firm's business fundamentals. They invest according to some simple ratios rather than on the company's financial statements. Ratios are just some numbers unless you are trained to decode them properly
In fact, our investors do not have any choice. They hardly know about fundamental analysis. They did not have any degree on business or finance, and did not know how to read financial statements of a company and that is alright. We should not expect from one professional to know about other occupations, in depth. For instance, a doctor may know nothing about software engineering or a lawyer might know nothing about architecture.
Furthermore, just think for once if we did not have trained doctors to treat our terrible diseases, we would have been dealing with our own diseases to survive, and thus the probability to die would have been about hundred per cent! As a matter of fact, like other technical fields, investment is also a technical task and an art. But a decision from the Securities and Exchange Commission (SEC) to allow trained investment advisors to advise small investors can bridge the gap between small investors and the market. Since small investors usually lack basic knowledge of investing in the share market, and thus face the brutal consequence by losing life-time savings, advice from trained investment professionals can help them to take judicious investment decisions.
Small investors might get greedy easily with scams and tricks by market manipulators, and, thus, can make reckless investment decisions. Whenever market is behaving abnormally - surely, it is abnormal if you have to pay Taka 25,000 for a Taka 100 worth share as it happened in 1996 -- investment advisors will analyse the situation and will provide all the pros and cons about investing in such a volatile time so that small investors can control their loss significantly. In fact, if investment advisors were in place, we could have put ceiling on the damage caused by 1996's market collapse.
However, one might mention about the great axiom "let the buyer beware" which means that the buyers have the responsibility to understand what they were buying. Yes, it's true that before investing in the stock market, investors should be fully aware of the risk of losing their life-time savings. But someone, i.e., trained personnel, must be available there to explain what kind of risk and return is currently prevailing in the marketplace, or what should be asset mix to increase return with minimal risk.
Professional investment advisors counsel small investors about making prudent investment decisions and also tax consequences for a certain amount of fee. But what does an "investment advisor" mean? US. Investment Advisers Act of 1940, which regulates Investment Advisers, describes an "Investment Adviser" as a person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. With certain exceptions, this Investment Advisors Act of 1940 requires that practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.
How can we train students as "Investment Advisors"? All the private universities and several public universities have finance, business or economics department. At undergraduate level, some colleges also teach finance now. However, universities also need to reorganise their curriculum to prepare students as an investment advisor rather than only preparing them for working in the banks. The main things an investment advisor needs to know is that an investor's investment objective and also his level of risk tolerance. Universities should heavily focus on investment and business principles, investment analysis, portfolio management, taxation, general banking, basic psychology, economics, and investment laws and market regulations. Still our finance curriculum mainly focuses on accounting derivatives, e.g., project financing, cost management, budgeting etc.
After completing the programme in the universities, doctors or pharmacists have to sit for professional exams to qualify for practice for a fee. Similarly, a finance or business graduate should participate in professional qualifying, i.e., licencing exams to practice as an "investment advisor" for a fee. In the USA, all professional investment advisors has to take series seven exams, which cover all the basics of investing including general investment laws, stock market, bonds, derivatives and taxation. There are other tests, for instance, Series 65 exam. is primarily concerned about investment laws, Series 86 and 87 exams. cover information and data collection, analysis, modeling and valuation, preparation of research reports, dissemination of information. However, other advanced level profession tests are also available. The SEC can have a wing to administer, for a fee, all the licensing profession tests leading to professional investment advisor designation.
Up to now, the government failed to bring masterminds of 1996's stock market crash under justice. Justice delayed is justice denied. And these kinds of failures give wrong signals in the marketplace and will induce manipulators from home and abroad. A significant portion of Bangladeshis still dislike stock market because of the crash in 1996.
Though it takes years to build confidence, people can lose it very quickly in the stock market. The SEC must always keep track of an investment advisor's activities, and must observe "zero tolerance" policy. All complains related to the stock market, including investment advisors, must be settled by minimal time. Speedy Trial Act, 2002, might be an option.
From current financial crisis, one thing is clear: innovation in the financial market does not come without a cost. It increases frequency of bubbles-burst cycles, poses systematic risk to the whole economy etc. Some economists blame innovative and complex credit default swaps (CDS) for recent financial turmoil. Indeed, investing in derivatives, i.e., in commodities exchange, is much complex than investing in the stock market. Mass irrational investment in the complex commodity market will pose a systematic risk to the whole economy. Since Bangladesh is considering having a commodity exchange, introducing "investment advisor" concept is a must for increasing efficiency and for the normal functioning of the market.
However, in the beginning, investors will not seek assistance from professional advisors. But in time they will understand the need for professional advice. Long back people hardly visited any doctors in the village, and used to go to a quack only in case of emergency. Women in the village were not allowed to seek health care advice even not in times of pregnancy. Now even people in the villages understand the necessity of a specialist doctor. Similarly, since our market is getting complex because of new innovative products, investors will eventually have to seek assistance regarding investment from trained "investment advisors".
Because of higher return, our market is getting attention of non-resident Bangladeshis as well as emerging market investment giants like Goldman Sachs, Citigroup etc. In 2007, according to Motley Fool Global Gains research report, in terms of stock return, Bangladesh stands first in the list with 134 per cent return. China, Ukraine, Cote d'Ivorie and Nigeria comes next in the list with 132 per cent, 125 per cent, 110 per cent and 106 per cent return respectively.
Breadth and depth of our market is also increasing every year, and also performing better than expected. Today roughly two million people are involved with the stock market in Bangladesh. At least one hundred thousand new investors have entered the capital market in the last two years. Since most of the newly signed up investors have no even basic knowledge about the market system and investment techniques, trained "Investor Advisors" are critical to the functioning of an efficient market.
Allowing trained investment advisors to advise small investors to take prudent investment decision will open a new era in the investment arena in Bangladesh. If we can induce small investors to seek advice from trained investment advisors, overall risk management in the marketplace will be impacted positively. In addition to increasing employment opportunities for business students, in the long-run, the result of this introduction of "investment advisor" is a far more active, efficient, and transparent capital market that facilitates the capital formation which is vital to our economy. Because it is the responsibility of the SEC to secure small investors' investment and also to increase efficiency of the overall market, it should take all the measures to provide regulatory framework leading toward ensuring trained "investment advisor" in Bangladesh; Otherwise, a new 1996 is eminent.
The writer is a PhD student at Texas Tech University, Texas, USA. He can be reached at
email: mainul.ahsan@ttu.edu
DEMONSTRATION at Dhaka Stock Exchange (DSE) is becoming an "every week phenomenon". Whenever there is a bearish trend in the market, investors initiate procession or chant slogan in front of the DSE. Our investors are not ready yet to accept a bearish or declining market. It looks like a demonstration has become a part of our national characteristics -- whenever something goes against out interest, we chant slogans or start rally. An investor should always be ready for any market situation, and should invest accordingly. An investor needs to remember that a bad decision will lead to damage of his life-time savings. But how can a small investor -- who knows nothing about stock market -- will be able to take wise investment decisions at the DSE? Don't they need to take advice from well-trained professional investment advisors? In Bangladesh, we don't have trained professional investment advisors to guide small investors about investing in the stock market.
Last summer this writer went to visit his ancestral home in a small union in Lakshmipur district. He was surprised to see that even small business-owners and students are involved in investing in the share market. Those investors already made some quick money through IPOs and thought that investing in the stock market is an easy way to make money. Or they tried to guess short term market movement and paid the price for their mistake. Though one can't predict the short-term movements of the stock market, what is likely is that the market will move higher, perhaps substantially, in the long-run. Moreover, initial public offering (IPO) through lottery provided them some quick money which will be no longer a reality because introduction of the new book building technique. That means investors have to find some good deal in the secondary market which demand depth knowledge in finance and also patience.
However, our investors are mainly concerned about finding some trends in the market, i.e. technical analysis, rather than knowing firm's business fundamentals. They invest according to some simple ratios rather than on the company's financial statements. Ratios are just some numbers unless you are trained to decode them properly
In fact, our investors do not have any choice. They hardly know about fundamental analysis. They did not have any degree on business or finance, and did not know how to read financial statements of a company and that is alright. We should not expect from one professional to know about other occupations, in depth. For instance, a doctor may know nothing about software engineering or a lawyer might know nothing about architecture.
Furthermore, just think for once if we did not have trained doctors to treat our terrible diseases, we would have been dealing with our own diseases to survive, and thus the probability to die would have been about hundred per cent! As a matter of fact, like other technical fields, investment is also a technical task and an art. But a decision from the Securities and Exchange Commission (SEC) to allow trained investment advisors to advise small investors can bridge the gap between small investors and the market. Since small investors usually lack basic knowledge of investing in the share market, and thus face the brutal consequence by losing life-time savings, advice from trained investment professionals can help them to take judicious investment decisions.
Small investors might get greedy easily with scams and tricks by market manipulators, and, thus, can make reckless investment decisions. Whenever market is behaving abnormally - surely, it is abnormal if you have to pay Taka 25,000 for a Taka 100 worth share as it happened in 1996 -- investment advisors will analyse the situation and will provide all the pros and cons about investing in such a volatile time so that small investors can control their loss significantly. In fact, if investment advisors were in place, we could have put ceiling on the damage caused by 1996's market collapse.
However, one might mention about the great axiom "let the buyer beware" which means that the buyers have the responsibility to understand what they were buying. Yes, it's true that before investing in the stock market, investors should be fully aware of the risk of losing their life-time savings. But someone, i.e., trained personnel, must be available there to explain what kind of risk and return is currently prevailing in the marketplace, or what should be asset mix to increase return with minimal risk.
Professional investment advisors counsel small investors about making prudent investment decisions and also tax consequences for a certain amount of fee. But what does an "investment advisor" mean? US. Investment Advisers Act of 1940, which regulates Investment Advisers, describes an "Investment Adviser" as a person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. With certain exceptions, this Investment Advisors Act of 1940 requires that practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors.
How can we train students as "Investment Advisors"? All the private universities and several public universities have finance, business or economics department. At undergraduate level, some colleges also teach finance now. However, universities also need to reorganise their curriculum to prepare students as an investment advisor rather than only preparing them for working in the banks. The main things an investment advisor needs to know is that an investor's investment objective and also his level of risk tolerance. Universities should heavily focus on investment and business principles, investment analysis, portfolio management, taxation, general banking, basic psychology, economics, and investment laws and market regulations. Still our finance curriculum mainly focuses on accounting derivatives, e.g., project financing, cost management, budgeting etc.
After completing the programme in the universities, doctors or pharmacists have to sit for professional exams to qualify for practice for a fee. Similarly, a finance or business graduate should participate in professional qualifying, i.e., licencing exams to practice as an "investment advisor" for a fee. In the USA, all professional investment advisors has to take series seven exams, which cover all the basics of investing including general investment laws, stock market, bonds, derivatives and taxation. There are other tests, for instance, Series 65 exam. is primarily concerned about investment laws, Series 86 and 87 exams. cover information and data collection, analysis, modeling and valuation, preparation of research reports, dissemination of information. However, other advanced level profession tests are also available. The SEC can have a wing to administer, for a fee, all the licensing profession tests leading to professional investment advisor designation.
Up to now, the government failed to bring masterminds of 1996's stock market crash under justice. Justice delayed is justice denied. And these kinds of failures give wrong signals in the marketplace and will induce manipulators from home and abroad. A significant portion of Bangladeshis still dislike stock market because of the crash in 1996.
Though it takes years to build confidence, people can lose it very quickly in the stock market. The SEC must always keep track of an investment advisor's activities, and must observe "zero tolerance" policy. All complains related to the stock market, including investment advisors, must be settled by minimal time. Speedy Trial Act, 2002, might be an option.
From current financial crisis, one thing is clear: innovation in the financial market does not come without a cost. It increases frequency of bubbles-burst cycles, poses systematic risk to the whole economy etc. Some economists blame innovative and complex credit default swaps (CDS) for recent financial turmoil. Indeed, investing in derivatives, i.e., in commodities exchange, is much complex than investing in the stock market. Mass irrational investment in the complex commodity market will pose a systematic risk to the whole economy. Since Bangladesh is considering having a commodity exchange, introducing "investment advisor" concept is a must for increasing efficiency and for the normal functioning of the market.
However, in the beginning, investors will not seek assistance from professional advisors. But in time they will understand the need for professional advice. Long back people hardly visited any doctors in the village, and used to go to a quack only in case of emergency. Women in the village were not allowed to seek health care advice even not in times of pregnancy. Now even people in the villages understand the necessity of a specialist doctor. Similarly, since our market is getting complex because of new innovative products, investors will eventually have to seek assistance regarding investment from trained "investment advisors".
Because of higher return, our market is getting attention of non-resident Bangladeshis as well as emerging market investment giants like Goldman Sachs, Citigroup etc. In 2007, according to Motley Fool Global Gains research report, in terms of stock return, Bangladesh stands first in the list with 134 per cent return. China, Ukraine, Cote d'Ivorie and Nigeria comes next in the list with 132 per cent, 125 per cent, 110 per cent and 106 per cent return respectively.
Breadth and depth of our market is also increasing every year, and also performing better than expected. Today roughly two million people are involved with the stock market in Bangladesh. At least one hundred thousand new investors have entered the capital market in the last two years. Since most of the newly signed up investors have no even basic knowledge about the market system and investment techniques, trained "Investor Advisors" are critical to the functioning of an efficient market.
Allowing trained investment advisors to advise small investors to take prudent investment decision will open a new era in the investment arena in Bangladesh. If we can induce small investors to seek advice from trained investment advisors, overall risk management in the marketplace will be impacted positively. In addition to increasing employment opportunities for business students, in the long-run, the result of this introduction of "investment advisor" is a far more active, efficient, and transparent capital market that facilitates the capital formation which is vital to our economy. Because it is the responsibility of the SEC to secure small investors' investment and also to increase efficiency of the overall market, it should take all the measures to provide regulatory framework leading toward ensuring trained "investment advisor" in Bangladesh; Otherwise, a new 1996 is eminent.
The writer is a PhD student at Texas Tech University, Texas, USA. He can be reached at
email: mainul.ahsan@ttu.edu