Jimmy A Patel, MD & CEO, Quantum Mutual Fund, on the importance of ethics in financial advisory.
Every industry has service providers. In the financial sector, the penetration of independent advisers for mutual fund businesses is low compared to insurance agents. This is primarily because of the stricter norms the mutual fund industry follows, which is for the welfare of investors.
In contrast, investment advisers are like financial doctors who counsel investors in making prudent investment decisions. They don many hats - as an asset manager, financial planner, psychologist, and investment counsellor to service their clients’ financial needs and help them achieve their financial goals.
Several factors hinder the financial advisory business. Primarily, the mutual fund industry faces ethical issues because of situations like:
- Generally, insurance products are sold as investment products
- Advisers catering only to high net worth clients
Not all retail investors easily trust financial advisers because they are unable to distinguish between unscrupulous and ethical advice. Investors seek proficient financial advisers when they are looking forward to honest, ethical, and transparent advice.
Douglas Adams, an English writer, humourist, and dramatist once said, “To give real service you must add something which cannot be bought or measured with money, and that is sincerity and integrity.”
So, if investors receive high-quality, valuable financial advice that’s aligned with their level of satisfaction and risk tolerance, they will begin to trust financial advisers. Trust can only be built on the foundation of integrity and perhaps, that’s the way for financial advisers to function as financial guardians.
Moreover, it is very important for advisers to show effective relationship management skills in order to cultivate trust to retain clients and attract new ones through referrals, based on credibility in a shifting advisory space.
And for that, ethics is the cornerstone of the financial advisory business.
Being ethical benefits advisers in the following ways:
- Earns respect and carves a niche for oneself
- When an adviser handles the clients’/investors’ money with care they gain their trust and goodwill
- Will save the adviser from facing the wrath from employees, customers, and everyone else he/she happens to deal with
- Will help earn profits as ethics have a positive correlation with profitability for long-term success
- It promotes a healthy organisational culture
Given the amount of competition in the industry today, with banks eyeing a share of the pie in the wealth management space, acquiring a larger piece of the pie and retaining it, is quite challenging. Everyone is claiming to provide the best advice, best service, and offering a delightful experience.
So, how do independent financial advisers stand out and earn the respect and trust of clients?
For IFAs to earn trust, placing the investor’s/ client’s interest first and following high fiduciary standards always is essential.
“Trust is one of the most written about and researched topics because many of us have been betrayed,” says David Bedrick, a practising psychologist.
Cultivating trust is a time-consuming process. It cannot be built in a few days. Also, going beyond the purview of the law and acting morally in the best interest of clients will gain advisers trust and goodwill. So, beat the stereotype.
Well, one of the ways of doing this is by providing prudent, unbiased, and ethical advice, wherein the interest of the investor/client is put at the fore at all times and their hard-earned money is handled with utmost care recognising their needs, risk profile, investment objectives, financial goals, and the time horizon before goals befall.
This thoughtful approach can help IFAs gain the confidence of investors. And if they are handheld with empathy and care, render solution-oriented advice in their journey of wealth creation, it can be a win-win and earn loyalty, respect, and trust of investors/clients. They may even recommend the service to friends and family members and help IFAs build a business on goodwill.
IFAs should refrain from pushing products, which can make clients uncomfortable. People do not like being sold; rather they like to make their own decisions to buy recommended services and products.
Focus on building the trust of a prospective client by being a “good listener”. The more an adviser listens, the more he/she can focus on understanding the client’s requirements, doubts, risks, and goals.
As an IFA, one needs to set clear expectations and explain to clients what he/she can offer. As their financial partner, the guidance coupled with the experience provided should add value to investors. Hence, ensure that from the beginning of the relationship, you as an adviser engage in a two-way, transparent, communication with your clients consistently and continually.
Investors will be happy to entrust their investments with someone who not only understands their financial goals, but one who can meet their functional, emotional, and ethical needs.
IFAs always need to ensure their clients' financial wellbeing. Therefore, understanding the client’s financial history, present circumstances, and their financial goals are equally important.
Plus, setting realistic risk-return expectations from an investment avenue is a fundamental role IFAs play. Always be transparent as the role of the adviser has evolved from one of recommending products to one encompassing a more holistic approach and examining the client’s entire financial situation methodically. It will help the clients understand that there is no guarantee of success and their expectations will be reasonable.
Also, IFAs must maintain the integrity and adopt the utmost care and diligence by always providing accurate information to the clients, helping them even during tough times, having additional support and backup staff, keeping up with the timelines in providing advice to clients, and responding to their queries promptly.
Offering tools and calculators for online tracking of investments vide a portal and timely response with accurate information to their queries is perceived to be of immense value. Hence, offer value-add-ons to keep the clients’ engaged and satisfied.
And do take the time to assure clients that as their adviser, you will always do your best for their valued clients. In this way, there will be no place for dissatisfaction later. Clearly, state that you understand your responsibility towards your investor/client, and hence will provide periodic portfolio reviews and statements as well.
Summing up
For investors/clients to stick around for the long term, it is important for IFAs to build a relationship founded on integrity, ethics, and prudent business practices.
Remember, building trust and gaining the respect of investors/clients is a process; IFAs need to earn their goodwill. It will not happen by chance; you have to consistently be there for them throughout their financial journey and make a conscious effort.
To achieve this, as an IFA it is imperative for you to distinguish yourself from the crowd by standing for thoroughly researched, honest, unbiased, and ethical advice.
As a credible adviser, to foster trust requires devoting time for clients initially. This will reap substantial rewards for you in the form of higher client retention and referral rates in the long term.
