Is your advisor a fiduciary for name sake?

In India, we respect gurus or people with wisdom a lot.  They are the ones who have the knowledge & help us in our journey of life.

In this journey, money is an important constituent. We all spend our waking hours doing things to earn a living – for the better part of our lives. 

However, money so earned with so much effort, is not managed well. Many times, people try to do it themselves. Even if they do want someone to advise them, good advisors are not easily available. Even if they are available, they are not those advisors who put the client’s interest right at the top.

There are few such advisors, who put their client’s interest ahead of everything else, including their own self interests. These advisors are known as Fiduciaries.

Fiduciary responsibility – Under the Investment Adviser Regulations 2013 of SEBI, Advisers who have registered have taken a Fiduciary responsibility. This means that such Registered Investment Advisers (RIAs) will always need to act in the best interest of the client, in every way.

They are also expected to get directly paid fees only by the clients and not get embedded, indirect remuneration in the form of commissions, which would bring in conflicts of interest.

This is a wonderful development for the investor community as the financial services space is populated mostly by product sellers, who have their schemes to promote. Distributors of products/ schemes represent their principals, want to sell their wares, meet their targets & earn their commissions. The client’s best interest gets sacrificed in this approach where the focus is on product sales.

However, there is a problem with the Fiduciary responsibility as well, as practiced by some advisors, which investors need to know in their best interests.

What one needs to know is whether the advisor is truly a Fiduciary or is the advisor checking the fiduciary box from the regulation point of view?

This is very confusing for a lay investor, to put it mildly.

Is your advisor a Fiduciary to the client in the true sense of the word ?  – This statement may sound confusing as one may assume that if an advisor is a Fiduciary, they are Fiduciaries to their clients.

Alas, the reality can be quite different! Let us see how.

The Advisers registered under SEBI IA Regulations 2013, need to act in a Fiduciary capacity alright. But, SEBI, as a regulator, oversees some products in the financial services space. There are three other regulators who have different jurisdictions – like IRDA for Insurance, PFRDA for Pension products & RBI for Banking related products.

If an advisor who is registered with SEBI sticks to the fee-only approach with regards to providing advice on products coming under SEBI & deals with other products outside SEBI ambit on a commission basis, they would still be following the SEBI IA Regulations. They would however be abusing the spirit of the regulation.

In the above case, they are a Fiduciary as per the SEBI IA regulation, but not from the client point of view!

How do commissions go against the fiduciary standard of care –  Commissions are not bad. Every person rendering a service will need to get remunerated. However, indirect, embedded remuneration along with the fact that they now represent a principal while at the same time claiming to represent the client, brings in conflicts of interest.

When intermediaries represent some principal, they may be beholden to their directions, guidance & targets. When their principal is paying them, there is a natural allegiance to them, which clearly would not be in client’s best interests. Such intermediaries are also prone to offering products which give them the best commissions/ incentives.

Such conflict of interest compromises the independence & objectivity of the adviser. This takes away the intense client-centricity that otherwise a Fiduciary is supposed to work with.  A true advisor needs to represent only their client and no one else, as also get paid only by them.

That is the reason why a true Fiduciary should not represent anyone except the client and not accept remuneration from anyone, except the client, even if the regulation permits it.

Disclosures by themselves do not reduce conflicts –  Some advisers are registered under IA Regulation of SEBI, but have other departments, entities or related parties who are distributing products. This is permitted as per the existing regulation.

However, conflicts of interest is very much there in these cases, which they are supposed to mitigate by just disclosing it to their clients! This does not minimize the conflict – only the client knows that there are some conflicts and they may have to live with it.

Also, disclosure documents are long winding and in small print that no one really goes through. Disclosure documents have hence become a tool for obfuscation & not telling the truth, rather than clarifying and conveying.  

Disclosures, along with disclaimers, are ironically permitted to paper over conflicts of interests. These are extensively used by advisors to hide behind.

A true Fiduciary to the client – Fiduciary is an abused word today.  Different people give different definitions to this.

Fiduciary is one who puts the client’s best interests ahead of everything, including their own self interest. It should be that way, irrespective of regulations, if they want to act as true Fiduciaries to their clients.

As seen earlier, that would be possible only if they are truly independent & do not receive indirect remuneration from some principal, whose product they are dealing in.

There is no immediate solution to this problem. This will get sorted only when a super regulator comes up, who will oversee all financial services intermediaries.

Till then, the advisors themselves will need to set themselves up for the higher standard in true Fiduciary spirit, to only represent the client and be truly independent.  They need to act with ethics & integrity and uphold the Fiduciary standard from the client point of view.

Clients may find it hard to know this difference. They need to ask their advisors about the nature of their Fiduciary position. They should hire them only if they are true Fiduciaries.