Advisor/distributor: Acquires clients, understands their requirements and financials, assesses asset class, completes due diligence like KYC, suggests risk base products/schemes, monitors and realigns portfolio.
Manufacturer: Completes due diligence, product performance to beat benchmark, transparency, performance statement.
Who is the owner of the client?
There has always been this debatable question that has gone unanswered for a while now:
Is it the financial advisor that is guiding the client through his investment decisions or is it the manufacturer who is responsible for the financial instrument’s creation, design, and distribution?
There is a rather thin and blurry line between the two making it a hot topic that is up for discussion.
SEBI is yet to shell out its mandate on the separation in the role of investment advisor and manufacturer or distributor which can transform the investment business in India.
In this article, I decided to share my insight to the best of my knowledge.
Up to what level does the client’s ownership lie with the advisor?
Every investor who is unfamiliar with the financial markets, its volatility and the available plethora of instruments for investments needs a financial advisor to ensure his income is securely and appropriately invested – this is client acquisition. The top priority of the advisor is the gain of the client (investor), which demands preference over personal gain. Determining a client’s needs, risk appetite and ability come post-assessment of the financial position of the client and necessary due diligence. Then there is advice – suggestions of financial instruments based on risks and schemes, monitoring the portfolio and nurturing the investment by rebalancing portfolios. There is no doubt that the advisor is the primary influencer in an investor’s decision-making process.
The manufacturer’s ownership at play?
Once the investor has chosen his investment instrument the manufacturer must ensure due diligence is complete. Ensuring disclosure and transparency of product information to investors based on possible risk exposure has to be an on-going process. The other set of responsibilities include monitoring the product to meet and beat its appropriate benchmark which is the standard yardstick to measure its performance; and finally, to ensure regular performance update to investors on their chosen investments.
Regarding the ownership of the client, the lines are blurred due to varied reasons: 
· The nomenclature of Independent Financial Advisors
· Maintenance of Chinese Wall and Segregation of Investment Advisory services with other activities.
· Distributors that play a dual role of the manufacturer as well as an advisor; these are entities exempted for providing investment advice incidental to their main business.
Property rights are a fundamental concept in economics. Ownership determines the control rights and in-turn influences the financial performance of which the outcome is realization of the investor’s goals. Research has found that ownership of a client relationship does influence financial advisor’s behavior; when advisors are given ownership of the relationship, they generate fewer customer complaints.
In my opinion, the role of advisor and manufacturer are distinct, it is only when the distributor also becomes the advisor is when trouble occurs. For a clear characterization there needs to be a specific definition under the nomenclature of IFAs which illustrates and defines their activities and duties. But, this must be done keeping in mind the financial viability and framework of the advisory business for the benefit of IFAs whose prosperity in-turn accelerates the growth of the financial industry at large.
To avoid trouble arising from a conflict of interest, the roles of the financial advisor and the manufacturer should be clearly spelt out. Only then will the IFA be able to competently advise clients on financial planning tools in India, and give the services becoming of the best financial advisor.
By Rajan Pathak, Co-Founder & MD, Fintso
Rajan is known for his in-depth insight into the financial entrepreneur’s venture with 25+ years of establishing various B2B businesses, which gives him the edge and adeptness to scale the advisory business.
As the CEO of IFAN Finserv (formerly ING), Rajan managed a team of 40+ people, created a wide network serving 1300+ Independent Financial Advisors managing assets over $500 million.