A fiduciary is a person who puts the client’s best interest ahead of his/her own self interest. Hence, a fiduciary is someone who can be implicitly trusted.
Onus still on customers in the financial services space
The financial services area still operates on the Caveat Emptor principle. Buyers must keep their eyes open and keep checking if they are being given the right offerings or being taken for a ride. Many times, people end up with a lemon as they do not do the required due diligence. This is complicated by the fact that there has been a humongous growth in the financial services space and the products on offer have become very complex.
The wealth of people is increasing; goal values are going up and lifestyle expenses have risen. Thus, ensuring that finances are managed properly has become extremely critical.
It is difficult to manage on one’s own and cannot be done by taking the help of product distributors who have a vested interest while suggesting products. Hence, the advisor’s role is becoming increasingly important.
Client-centric advisors
SEBI IA Regulations 2013 have sought to address this issue by creating a new category of advisors who put the client’s interest first, are independent, conflict-free and operate on a fee-only basis.
The regulation allows advisory and distribution services by the same entity, but by keeping them segregated and at arm’s length. Also, the same needs to be disclosed to the client. However, this arrangement is not completely conflict-free.
Conflict disclosure just informs client of the problem. But the issue cannot be wished away. However, this is way better than the product seller also advising clients, a phenomenon that would result in conflicts of interest becoming full-blown.
Even in case of a complete fee-only advisor, there can still be issues, which the client needs to be aware of and check for. A fee-only advisor can be a true Fiduciary. But, the client still needs to know if that is the case.
Is your advisor a True Fiduciary?
A true fiduciary should act entirely in the client’s best interests. For that, being fee-only is an enabling condition. But there could be problems.
There are four regulators now – Securities and Exchange Board of India (SEBI), IRDAI, RBI and PFRDA. All these regulators have rules for those coming under their purview. But, they have no jurisdiction over someone operating outside their domain.
For instance, if an IA (investment advisor) registered under SEBI as a fee-only advisor sells an insurance product, the independence of the advisor is compromised as he/she now represents an insurance company, and not just his/her client. This brings in conflict of interest. But, SEBI cannot object as it is outside its purview.
Such an advisor will not be able to act in a true fiduciary capacity while advising a client. However, the client may not know this, as he/she assumes that being registered under IA regulations, the advisor acts in a Fiduciary capacity. The fact is that the advisor is acting in a Fiduciary capacity, only as per IA Regulations.
This is the limitation of the current regulatory landscape where there are many regulators overseeing the financial services space. This problem will be solved only when a super regulator that oversees the entire financial services domain comes into being. Till then, these problems will exist.
Acting in the client’s interest
To act as a true fiduciary to the client, the advisor needs to fully act as per the best interests of the clients. Such advisors should not deal in any product that offers commissions or other indirect compensation and compromise their independence. Merely stating this to the clients by way of disclosure is a charade. No one reads pages of disclosure, which serves the purpose of merely discharging one’s regulatory obligation and nothing more.
Advisors need to rise well above the regulatory fiat and hold themselves accountable to much higher standards, in the true spirit of the regulations. Their conduct should be above reproach and they need to maintain high probity in their professional domain. They need to act with ethics and integrity.
They need to be Fiduciaries to their clients not because the regulations warrant it, but due to the deep sense of duty they feel towards their clients.
(The writer is founder Ladder7 Financial Advisories)
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
