Here is short transcript between Senator Carl Levin and Goldman Sach’s CEO Lloyd Blankfein. The argument is whether should Goldman Sact disclosed to clients it had betted against the security which they sold to clients. To Senator Levin, that’s considered conflict of interest. But to Goldman Sach, there is no necessity to disclose it because this is part and parcel of market making and that they are not fiduciaries.
What are fiduciaries? According to http://en.wikipedia.org/wiki/Fiduciary:
A fiduciary duty is a legal or ethical relationship of confidence or trust between two or more parties, most commonly a fiduciary and a principal. One party, for example a corporate trust company or the trust department of a bank, holds a fiduciary relation or acts in a fiduciary capacity to another, such as one whose funds are entrusted to it for investment. In a fiduciary relation one person, in a position of vulnerability, justifiably reposes confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires one to act at all times for the sole benefit and interests of another, with loyalty to those interests.
The elements of a fiduciary relationship are:
- There is two or more parties: The Principal and fiduciary ;
- The relationship is based on confidence or trust ;
- The fiduciary is vulnerable and relies on good faith, reliance and trust of the other ;
- The principal acts in good conscience to act at all times for the sole benefit and interest of another; and
I want to say something about fiduciary duties between a financial adviser and a client in Singapore’s context. Many clients do not realized that there is no fiduciary duty that arises out of the financial adviser-client relationship. Very often, the financial adviser is a representative of his principal (the Agency) and he himself - the Agent – has the duty to ensure his Agency’s (Principal) interest is looked after. Many clients are confused thinking that their adviser is their “Agent” when in reality the client is merely a customer. The word “Agent” is a misnomer. Often, clients would say that “my agent told me that…”. Actually, the client has no agent. The person whom the client deals with is the salesperson who is the Agent of his Agency (the Principal). For those who are now confused, I am not referring merely to tied-agents. The Agency can be IFA firm, the bank, the stock brokerage house, etc.
The Financial Advisers Act (FAA) does not mention the necessity to impose fiduciary duty upon the relationship between financial adviser and client. The FAA only requires that recommendations are to be made based on a reasonable basis. But all FA knows this is a joke because “reasonable” is easily demonstrated through documentation. These are some examples of “reasonable basis recommendation” verses recommendation based on fiduciary duty:
Example 1: A client tells his financial adviser of the desire to have some currency exposure. The FA would recommend a dual currency investment. The basis of recommendation sounds reasonable as this product allows currency exposure in accordance to the client’s desire. But if the relationship is one of a fiduciary, the FA would inquire what is the reason for currency exposure . If the client does not have a good reason for such currency exposure, the FA under fiduciary duty will not transact the request. By not transacting, the FA forfeits the commission.
Example 2: A client wish to get a medical insurance. A recommendation for a medical insurance having world-wide coverage is considered reasonable since this is a medical insurance. However, under fiduciary duty, the FA will inquire whether will treatment be done locally and whether will the client likely to be in another country on the long term basis. If the client says that he will always stay in Singapore, a medical insurance covering Singapore is sufficient. For the latter case, the commission is almost zero (after netting FA’s expenses and time) while the former insurance commission is huge. But it can be seen that fiduciary duty requires the FA to put client’s interest first.
Example 3: Client wishes to save $1000 per month for retirement. It is considered “reasonable” if the FA recommends an ILP with zero mortality for this purpose say over the next 25 years. Under fiduciary duty, the ILP is considered detrimental because it locks the client for 25 years with hefty early surrender penalty and as well as reduced liquidity due to such commitment. An FA under fiduciary duty would recommend an RSP which has no long-term locked in and no early penalty surrender. But this latter recommendation would means zero commission (after netting the FA’s time and expenses). The former’s recommendation would have incurred a gross commission of almost $12,000 UPFRONT!
It can also be seen that fiduciary duty appears to put the client’s interest first and to the detriment of the financial adviser. Not so. Fiduciary duty does not imply that the FA must “sacrifice” himself in order for his or her client to gain. This is where many FA reps are confused and mislead by their seniors. Fiduciary duty occurs in a professional relationship. If there is no professional relationship, there is no fiduciary duty. In any professional relationship, there will be professional fees. Such fees should be disclosed and agreed by the client in writing. Thus, there is no reason why FA should work for free in order to have a fiduciary duty towards their client. The argument can also be loosely turned the other way round – if the client does not pay any fee for such professional relationship, it is practically not possible for a financial adviser to have a fiduciary duty towards their clients as doing so will be detrimental to the adviser him/herself. Any adviser providing free service will not be in the business for long anyway.
The question is this: how many advisers in Singapore consider their relationship to their clients as fiduciaries?
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