Magazine Issues » May 2015

ASSOCIATION COLUMN: Putting investors first

Nnitin MehtaWhat are the appropriate professional standards for brokers, advisers and other investment agents who recommend funds, stocks, bonds or any other investment?

Following the financial crisis, regulators around the world have been tightening the required standards of conduct for intermediaries in order to protect investors. But the debate is far from over. 

The concept of fiduciary duty, with its obligation to put the interest of clients first, is now under greater discussion as a possible solution. 

In 2012, the Kay Review of the equity market in the UK suggested that “all participants in the equity investment chain should observe fiduciary standards in their relationships with their clients and customers”. 

Given the difficulty in the interpretation of the term and the uncertainty about its application, the UK Law Commission was asked to review the legal concept. 

Last year, they delivered the conclusion that the law of fiduciary duties should not be reformed. 

More recently, regulatory agencies in the US are debating whether to extend the fiduciary principle to registered brokers so that it replaces the criteria of ‘suitability’ for investment recommendations. 

The latest flurry of words was sparked by the Obama administration’s intent to improve investor protection and reduce conflicts in investment advice for retirement accounts.

In Europe, a patchwork of regulations aims to safeguard investors. For example, the conduct of business rules defined in MiFID II cover conflicts of interest, inducements and suitability. 

In addition, the improved key investor information document provides for pre-contractual disclosures for investment funds and other products. 

Complementing formal regulations and legal duties owed to clients, professions have long provided codes of conduct for their members that oblige them to put the interests of their clients first. 

While not strictly a fiduciary duty in the legal sense, the professional duty aims to elicit the same desired behaviour.

However, clients do not always understand their rights. The asymmetry in knowledge between the buyer and seller of financial products is often significant. 

To remedy this situation, CFA Institute has developed a simple Statement of Investor Rights, listing conduct that investors are entitled to expect from financial service providers. 

These rights reflect the fundamental ethical principles that are critical to achieving confidence and trust in any professional relationship. 

The list applies to financial products and services such as investment management, research and advice, personal banking, insurance and property or real estate. It includes:

• Honest, competent, and ethical conduct that complies with applicable law;  

• Independent and objective advice based on informed analysis, prudent judgment and diligent effort;  

• Precedence of clients’ interests over those of the professional and their organization;

• Fair treatment with respect to other clients;

• Disclosure of any existing or potential conflicts of interest in providing products or services;

• Suitability of advice based on the client’s financial circumstances, objectives and constraints; 

• Clear, accurate, complete and timely communications that conveys the information effectively;

• Explanations of all fees and costs charged, showing them to be fair and reasonable;

• Confidentiality of clients’ information;

• Appropriate and complete records to support the work done on clients’ behalf.

At the core of these rights is the ‘clients first’ obligation of investment professionals. Increasingly, a fiduciary standard that puts a client’s interest first and foremost is being regarded by investors as the gold standard in investor protection. 

Winning their trust and confidence is paramount to delivering the central purpose of finance.

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