The art of identifying an ethical financial adviser

Written by Sanjiv Mehta | Updated: Oct 21 2010, 10:04am hrs
Recently, for the first time in its history, the Harvard Business School appointed an Indian, Nitin Nohria, as its Dean. Notably, one of his main achievements was to inculcate Hippocratic Oath for MBA students at Harvard.

Being a physician who ventured into wealth management, I had written four years back about Hippocratic Oaths importance in financial services. Essentially, the oath implies that all actions of a physician will benefit his patients and not be directed for any other purpose. In personal wealth management space, it is equally applicable every action of a financial adviser should only be for benefit of his investors and nothing else.

After all, investors entrust their hard-earned savings to their financial advisers. Therefore, cultivating trust is essential for everyone who advices on wealth management. In an age where everyone seems to be selling something, how do you know who will really put your interests first More than ever, investors want independent and unbiased sources of advice. Investors come first, should be the mantra.

However, investors do not find it easy to differentiate between an ethical and unethical adviser. For example, wealth managers work in an atmosphere of uncertainty. It is an extremely skilled job where core competence is to generate returns without taking undue risk. Markets constantly go up and down, not only on economic fundamentals but also on unpredictable market sentiment. If a wealth manager is allocating long-term money to equities at the current Sensex level of 18000, advice is sound as Indian economic fundamentals are good and valuation ratios show a fairly valued market. However, market can take a path where it first goes down before going up again. So investors might have to go through a painful correction before the advice gets vindicated. In the interim, an investor can be mystified and confused about the genuineness of the advice.

So how do we help him, what are the signs, will there be any factors, which help in identifying an ethical adviser There are quite a few. Though any one factor on its own might not be conclusive, a combination of signs is beneficial.

One of the best indicators is wealth manager taking the same actions for his own portfolio and demonstrating meeting his goals.

* Is he determining your needs first Does he prepare a financial plan, prioritising your important goals and then deciding where to invest your savings

* Does he have an appropriate asset allocation, based on goals rather than in a vacuum Is the allocation based on time horizon of goals

* Does he have an undue insistence on products with high upfront costs and commissions for him, rather than those, which fulfil your needs in the most optimal manner One very good example is his insistence on selling Ulips, which are a combination of term insurance and mutual funds (the recent Sebi- Irda tussle was on the nature of Ulips). Ulips have high costs and upfront commissions; a similar solution at a much lower cost is by combining term insurance and zero load mutual funds.

* Is he trying to sell you products with long locked-in periods These usually have high upfront commissions. Therefore, while your liquidity is impaired, he earns commissions

* Does he churn your portfolio without any demonstrable benefit Each transaction will cost you while he pockets the commission. Sometimes, a genuine movement is required, however, frequency of such moves should alert you.

* Is he selling you products whose features, performance, risk and costs are non transparent

* Is he nurturing a long-term relationship with you An ethical adviser will have a long-term relationship with frequent portfolio monitoring and reviews

* Does he have a fee structure Is his revenue model dependent on transaction fees and upfront commissions If yes, you can expect churning & inappropriate products.

Summarising, an ethical wealth manager adds tremendous value and can have a significant impact on quality of your life, and there are signs, which you could utilise to identify one.

The writer is founder