We can’t be a master of all subjects, can we? Hence, we need to depend on many others having the expertise. Even if we do have the capabilities, we may end up depending on others to save time, or to get a task accomplished efficiently at a lower cost.
It is hence important to find a credible professional in that area. That professional needs to be trustworthy, ethical and has to be a person who acts in our best interest. In a nutshell, the person needs to be a Fiduciary. Fiduciaries are those who put the client’s interest ahead of everything, including their own self-interest.
But do such Fiduciaries exist?
The answer is complicated. First, finding those who have taken on Fiduciary responsibility is difficult. Next, finding out what kind of a Fiduciary they are, is even more difficult!
How the US defines fiduciaries
Fiduciaries are defined differently by different agencies. In the US, a mature market, there is a lot of confusion. There were about four different definitions for Fiduciaries at one point!
There was a definition proposed by the market regulator SEC, another by the Department of Labour, a third by the CFP Board and a fourth by voluntary organisations that have a fiduciary standard for their members. These are confusing even for people in the financial services industry.
The Department of Labour wanted those selling retirement products to be Fiduciaries. But that was later overturned.
There is lot of confusion in the average investor’s mind about the services they are availing. To simplify matters, the SEC has come up with a “best interest” to describe the standard of care instead of Fiduciary, as it feels there is better understanding of this term on the part of clients.
However, best interest is a much softer and looser term as compared to a Fiduciary, which denotes a complete alignment with client’s core interests and the advisor’s intent of furthering those ahead of everything else. Hence, best interest may be more understandable, but does not communicate the same seriousness of intent as a Fiduciary does. Also, a distributor may be acting in the best interest not in the same manner as a fee-only investment advisor. There lies the confusion!
The Indian Situation
Market regulator SEBI’s Investment Adviser Regulations 2013 has created a class of financial advisors that is client-centric, unbiased, receives fees as remuneration only from clients and carries a Fiduciary responsibility. Advisors are also held to higher standards in education, certification, processes, documentation etc.
However, such Investment Advisers (IA) can be corporates and can perform both advisory and distribution functions in separately identified and segregated divisions. Individual IAs may also have arms-length relationships, where relatives—wife, siblings, parents—may have a distribution business.
In both the above cases, there is still potential for conflict of interest. This is currently handled through appropriate disclosures of conflicts to let the clients know of the potential problems. But it does not make the conflict go away. Such advisers really cannot function as true Fiduciaries. The confusion about who is a Fiduciary is rife here as well.
By allowing advisors to also distribute products − whether it is through a separate division or another related entity that is segregated, arms-length relationship etc. − the conflicts of interests will come down, but still persist.
Twisting the definition of Fiduciary to accommodate commercial interests would be ironical and sabotage customer interests.
“Best interest” should not replace Fiduciary standard of care, for fee-only advisors. Best interests first need to be defined. But it would most probably represent a lower standard than that of a Fiduciary. That would be a step backwards, as the IA Regulations 2013 wanted to create a new class of advisors that act only in client’s interests and play a Fiduciary role.
Disclosures of conflicts of interest and other matters, declarations and disclaimers cannot be used to absolve advisors of responsibilities. These should be allowed for usage only to clarify further on core issues and point out areas which may still need the client’s attention.
The regulatory path ahead
There is a crying need for true Fiduciaries. There could be other standards such as best interest and suitability that may work for certain segments. SEBI needs to clearly define each of these standards and hold those constituents who fall under them to account.
Disclosures and disclaimers should be allowed only to provide further clarity rather than being used as a tool to subvert the essence of the regulation or dilute core responsibilities/standards.
Only a fee-only advisor can, in reality, be a true Fiduciary. Even in the case of such an advisor, s/he should not have glaring conflicts of interests like having an associate or a related party being there. In such cases, the only way a fee-only advisor can preserve fiduciary integrity is by not accepting clients of associates/related parties as clients. This is one of the safeguards that may be used.
The other is clear designations to various service providers that clearly communicate what they do − Mutual Fund Distributor, Fee-only Financial Advisor, Financial Advisor, Fee+ commission etc.
Only then will investors know who they are dealing with.
There is confusion in the minds of consumers at large about who they are dealing with, what to expect from them, how much to trust them etc. These need to be properly communicated to customers, to help them understand their options. The players in the financial services space will have to play ball.
(The writer is a SEBI Registered Investment Adviser & Founder of www.ladder7.co.in)