Rajesh Krishnamoorthy is the managing director at iFAST Financial India Pvt Ltd. He wrote this piece for the India Markets Observer.
As financial intermediaries, we are in the business of money! And in this business, the
most critical factor that contributes to the lasting success of ourselves is the trust that the
clients have in us. To be even more specific, the continuing trust that the clients have in us.
Needless to say, the day our clients start losing trust in us, and if that behaviour becomes
consistent across our client base, sooner than later, we will see ourselves staring at a gaping hole in our professional career, an equally gaping hole in our personal bank accounts and further more, a gaping hole in our ability to rise above the situation and fight back. If we end up losing the faith that our clients have in us, it means that we have botched up our professional and ethical conduct to abysmal levels.
Our clients realise that we are not in the business of charity. And, therefore, if we have, at any point in time, felt that they don’t know how we earn our daily bread if we don’t charge
them for the services we offer them, we are completely mistaken. Our clients do know that
we either earn from someone whose products we sell, or we earn from the fees that we bill
our clients, or a combination of both.
However, there has been a persisting reluctance in us to disclose to our customers what we end up earning as commissions when we sell them some financial products. Does this augur well in the context of a long term relationship with our clients?
The answer is clearly No!
The sooner we realise this, the better we are going to get in building a long term sustainable practice of financial intermediation.
Let’s get some more clarity here. Since August 2009, all mutual fund agents have a regulatory obligation to disclose commissions. The board meeting of SEBI after placing a ban on entry loads in the same document, noted as follows: The distributors shall disclose all the commissions (in the form of trail commission or any other mode) payable to them for all the different schemes/ different mutual funds whichare being distributed by them irrespective of the scheme(s) which is/are being recommended to the investor. The AMCs shall monitor the compliance of the same by their distributors.
Let us detach ourselves from a mere checklist compliance. This is very important for us
because although every AMC has ensured that the application form that the client signs
contains a simple one liner that states that you have disclosed to the client not only the
commissions that you draw from this particular product that he is buying into, but also of other similar or competing schemes in the market, you are getting your client to sign a confirmation of an action you are supposed to do. If you have actually not disclosed commission to your clients and you have got them to sign the dotted line, neither the client, nor the AMC is at the losing end... you will be, if not now, very soon!
I am going back to the first line – you highly risk the continuing trust that your clients will have in you.
When challenged, it is natural for us humans to “up” our defenses! So, when such a statement is made, it is but natural that your mind starts moving in the direction – how on earth is my client going to know about this? After all it is such a small one hidden amongst the many lines that client says he has read! He has also signed off saying that he has read the scheme information document and the scheme additional information before investing. So, compared to that, why is this author coming at me for just one sentence which in the first place, I never asked the AMC to print!
We must first realise that the reason why the client signs on the dotted line is because he
believes that you are doing the right thing for him. He believes that you are someone he can trust and that faith makes him sign the application form. It is not even a distant thought in his mind as to whether you are following regulations at that point in time. He believes in you. That’s the bottom line – and he signs the dotted line!
Let us fast forward to today. In 2015, you already have a few developments in the industry that you had not dreamt of in 2009! Today, you have direct plans in mutual funds. Your clients can get a better NAV if they invest in direct plans instead of the regular plans that you sell to him. Some hard number crunching will throw out a huge saving for the client if he had invested in the direct plan of the fund instead of the regular plan for a period of, say, 10-15 years. This difference on a Rs 50,000 investment can run into many lakhs!
What has direct plans got to do with disclosure of commission?
Most analytics and research websites that track mutual fund performance are already showing clearly to any visitor of these websites that the direct plan is the best performing fund in any category that you choose! Logical and as expected, isn’t it? But that comes as a surprise to your client if he doesn’t know it and he comes to know about it from such third party websites.
This leaves you with two choices – disclose that you get commissions from a regular product and that the direct plan doesn’t provide commissions to you. Or, keep quiet, and risk your future relationship with the clients by allowing them to be in the dark so long as someone other than you educates them.
If I were you, I would be choosing the former and not the latter. The latter is but obviously going to dent your future and leave a very bad taste in your client’s mind a few years, or if you are really lucky, a few more years from now. It’s essential that you disclose your commissions very clearly to your client and give him the comfort and the confidence that he is dealing with a transparent financial services intermediary!
You may still be unwilling to bite this suggestion and for all you know, this book by Patrick Lencioni titled Getting Naked has the answers as to why. He highlights three fears that prevent us from building trust and loyalty with our clients: Fear of losing the business, the fear of being embarrassed, and fear of feeling inferior.
If you aren’t disclosing commissions, you are not only faltering from a regulatory point of view, you are definitely placing a high risk of being recognised in the long run as a trustworthy financial adviser.
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