The Financial Services industry in India is replete with instances of hard-selling products that are not in the interests of the clients. This has been happening for decades. In many cases, the clients are not really aware of the kind of product they are getting into, what they are paying as costs, the benefits that will accrue to them and whether the product is really, truly suitable to them.
The excesses by the Financial services participants in the USA resulted in exotic, risky offerings being sold as high-quality products that resulted in a worldwide financial crisis, a decade back. Regulators across the world started waking up to the problem of the rapaciousness of financial intermediaries & the damage it can cause as well as the imperative of protecting investors interest.
They started enforcing responsibilities which advisors & product sellers now need to meet. The Fiduciary standard of care gained prominence around that time.
What is the Fiduciary standard of care?
Fiduciary standard of care is the highest standard of care which an advisor could offer. Those following this standard are called Fiduciaries.
Fiduciary Financial Advisors are expected to offer advice that puts the best interests of clients above everything else, including their own. They have a duty of loyalty and care towards their clients. They also need to avoid conflicts of interests that can undermine the quality of advice.
Often times, Fiduciary Financial Advisors need to come up with a solution that best suits the client from every viewpoint – in terms of product benefits, fitment to their goals, taxation, tenure & liquidity, costs etc. Simply put, this means that the client would get the best solution in their circumstances. The fiduciary standard is hence the ultimate guarantee of advisory quality that is consistent with and aligned with the client objectives. Fiduciaries hence have the best chance of enabling desirable outcomes, for their clients. It is precisely due to this, one should seek out a Fiduciary.
At Ladder7, we offer this fiduciary standard of care. It is not that we are just saying this. We are registered with SEBI (Securities and Exchange Board of India) as Fiduciaries & have a legal obligation. So, we are in letter & spirit – Fiduciaries.
What is the Suitability standard ?
There is another standard called the suitability standard. This standard is followed by distributors, brokers, agents etc. Someone following this standard would only need to reasonably believe that their recommendations to clients are suitable in terms of financial needs, objectives & circumstances. However, under this standard, they are not bound to suggest the best & the most appropriate one for the client, including cost considerations.
In suitability standard, their duty & loyalty can very well be towards the firm they work for or the principal and not necessarily the client. They can very well promote the products of the firms they represent even if there are other company products which have better benefits to the clients or a lower cost structure. As long as they suggest broadly suitable products for their client, they have done their job.
An illustration to clarify
For instance, if a product distributor suggests a pension product of the firm they represent to a person for retirement planning, it is fine as per the suitability standard, though the product cost of the company they may represent may be high, the annuity rates from that company may be low, other product benefits are lower etc. But this would not meet the Fiduciary standard, where the choice of the product should clearly be the best from the client’s viewpoint, in every way.
A Fiduciary Financial Advisor needs to look at all product categories (and not just pension products) that may meet the needs of a person in retirement, in the most efficient manner. Their focus is not the product, but the client & whatever they do would be from the viewpoint of what is best suited for the clients.
Are there separate certifications for Fiduciaries?
There are no separate certifications that mark out an advisor as a Fiduciary. Fiduciary standard imposes on an advisor the highest standards of conduct & responsibilities towards the client, which place the client’s interest ahead of everything else.
However, Fiduciary advice will invariably need an advisor to be appropriately qualified. Only then the advisor will be able to analyse and come up with an appropriate solution aligned with the client’s requirements. Hence, Fiduciaries will need to be properly qualified to discharge their responsibility towards their clients.
What about Fiduciary Financial advisors in India?
SEBI Investment Adviser Regulations 2013 was the first regulation which sought to create a new class of fee-only advisors, who also take on Fiduciary responsibilities. These are the only Fiduciaries currently in India in the Financial Advisory space.
This regulation sets certain basic qualifications. One coming under this regulation needs to be a graduate with five years experience or a Post-Graduate in an appropriate field. Along with this, the advisor under this regulation needs to have an appropriate certification like Certified Financial Planner (CFP).
Even within the ambit of this regulation, SEBI allows corporates to have both the advisory & distribution arms within the same entity, with appropriate segregation & arm’s length dealings. While SEBI allows this, this is not the best arrangement from the client’s point of view. The best bet would be to deal with a fee-only advisor who is not having any interest in product distribution.
What are the enabling conditions for a true Fiduciary?
A true Fiduciary needs to keep the client’s interest, front, and center. Unlike in other areas, the adherence to the requirements of Fiduciaries must be met in letter & spirit, for a person to be a true Fiduciary. She/he must not have any conflicts of interest that can undermine their role as someone working in the client’s best interests.
One of the primary requirements is that a Fiduciary should not receive remuneration or have any commercial arrangement with any product originators. This is to ensure that their objectivity is not in any way influenced by product providers. To perform the role of a Fiduciary, one will need to be remunerated only by the client and no one else – across all products recommended. There may still be residual conflicts of interest, which needs to be disclosed to the clients. Only then, one can function as a true Fiduciary.
Client’s are best served when their advisor acts only in their best interests. That can happen only when their advisor is a Fiduciary.
We are fee-only advisors and Fiduciaries – your guarantee for conflict-free & unbiased advice!