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Trust & Ethics: Keeping Financial Planners Honest

Mukesh Dedhia, CFP, IndiaBy Mukesh Dedhia, CFP

Trust! The word itself, gives you a sense of attachment. A belief that nothing will go wrong and even if it does then there is somebody to get you out of the trouble maze! For example, when a father throws his child up in the air, the child laughs his heart out, rather than fearing a fall. Why? Because there is a natural bond of trust between a child and parent. The child is sure, that, when it is with its’ parents, nothing can go wrong!

Such is the trust, financial planners, should try to implant in our clients. Of course, it won’t come naturally though! That’s where the onus lies with the planner to take the extra effort. The client will almost never open up in the first meeting. That’s why the planner has to tactically probe into the client’s needs and wants, rather than just numerically know the client’s “financial goals”. As a financial planner, it becomes our fiduciary duty to make the client feel comfortable and to strike the emotional chord for a better understanding of the client’s goals and ability to achieve them.

Trust and ethics sustains in the system mostly because of the framework drafted by the regulatory body. The execution of such frameworks should ensure the sustainability and growth of the intermediaries. As a result, this will motivate advisors to work ethically. When a financial planner assumes a client’s trust, he should consider himself in the role of a friend, philosopher and guide. A planner’s interest always lies in the interest of the client as satisfied customers create more business. Even if they don’t create more business, the job in itself is very fulfilling, gratifying the self-actualization need!

Educate the Client

Not only that, it’s also important to educate the client. I firmly believe and practice investor education. When a planner shares knowledge, it gives the client confidence. The client should be conversant that you are adding valueto them. Without educating your clients, they will never understand why you suggest a particular scheme over another.

When financial planners explain to clients the risk-return tradeoff right in the beginning of establishing the client-planner relationship, it automatically mellows down their high expectations from their investments. When they are introduced to and explained the market scenario and the pros and cons of exposing their money to risk, clients automatically understand the situation and will be more calm and composed in extreme market situations. There may be times where the planner has to re-explain the whole risk-return tradeoff again, just to eliminate the client’s fear.

The Problem with Commissions

Such hand-holding and free advice was always a part of the Indian financial services industry. But, since the investment advisor was compensated only in terms of commissions, they were motivated to work in the interest of the manufacturer and themselves rather than in the interest of the client. This led to mis-selling; hence, frontend commissions on financial products were considerably reduced.

The investment advisory business, here, in India is facing a transition where most of the distributors are upgrading themselves to become full-fledged financial planners. Going forward, the advisor will have to choose to play either the role of only a planner or a distributor. Indian investors are not paid fees for only financial advice and sustaining simply on a basis of miniscule commissions is difficult for the investment advisor. So planners are choosing a planner/distributor model which is viable. To avoid conflict of interest, once a particular product suits the requirements of the client for which the advisor may also happen to receive commission from AMC’s end, this informationshould be brought to the client and they should be given proportionate credit while charging advisory fees.

Following Through After Initial Sales

The role of the financial planner does not end at the implementation stage: it’s important to monitor the investments at regular intervals. It becomes important to maintain records, right from the data-gathering stage. These records can be maintained in writing or e-mail conversations can be stored. The best solution is to have an Investment Policy Statement. These records may be useful for future references and even in situations where the client becomes uncomfortable with their investment performance.


Imagine a situation where a client has complete trust in you, but you are caught in a predicament of choosing either the client’s interest or your own. This is the time when a financial planner’s career is tested.

Here I would like to share my own experience of getting wedged in a dilemma of choosing the client’s interest versus my own. A long time ago, I had this HNI client with whom I had a deal to rebate commissions. He was one of my biggest clients; his investments formed almost 25% of my company’s total AUM. One day, I encountered a situation where the client demanded a much higher commission rebate. I felt that I would be  tempted to sell him a not-so-appropriate product just for the sake of higher commissions even if the client had the willingness to invest in that product.

At this point, I realized I might cross the thin line between right and wrong. I disagreed to rebate, even though the client threatened of withdrawing all his assets from me. But I had made up my mind. That’s when I put my foot down, having realized that I wouldn’t do anything that would tempt me to not work in the interest of my client, even at the cost of losing my biggest client. Unfortunately, I lost this client but I was happy because I had maintained my ethics.

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