Putting Investors First…

Contributed by: Ishwar Chidambaram, CFA

IAIP and Indian Merchants’ Chamber’s Capital Market Committee organized a seminar in Mumbai entitled “Putting Investors First” on May 12, 2014. The speakers were Paul Smith, CFA, Managing Director Asia Pacific, CFA Institute and Navneet Munot, CFA, Chief Investment Officer, SBI Mutual Fund.

The session began with Deena Mehta of the IMC, who gave an overview of the agenda and introduced Paul. Paul began by mentioning a global survey, which indicated that Finance ranked near the bottom amongst all professions, in public respectability and acceptance. He explained reasons for this, citing erosion of public confidence in financial industry, especially post the recent financial crises. Next he introduced the history and background of CFA Institute and IAIP. He outlined aims, objectives and volunteer work done by IAIP. He emphasized importance of Ethics, which constitutes 15% of each level in CFA Curriculum.

Paul elaborated on 10 principles outlined in the Statement of Investor Rights, prepared and distributed by CFAI. This document is targeted towards the average investors. The principles and Paul’s commentary are as follows:

  1. Honest, competent & ethical conduct that applies with applicable laws: It is shocking but still necessary to mention this right explicitly
  2. Independent and objective advice: Investors must try to find out how advisors are getting remunerated through the products they sell to investors.
  3. Investors’ financial interests should take precedence over those of the professional: Fairly basic and key principle to be followed rigorously.
  4. Fair treatment with respect to other clients: All clients, irrespective of size, should be treated equally and fairly by the investment advisor.
  5. Disclosure of any conflicts of interest: One cannot avoid such conflicts, and it is unrealistic to eliminate them altogether. But it is unethical to fail to disclose such conflicts to the client.
  6. Proper understanding of clients’ circumstances: The advisor should provide questionnaires to understand the clients’ risk and return preferences, experiences and constraints.
  7. Clear, accurate, complete and timely communications: We all suffer from the confusing statements given by investment advisors. We must demand more clarity and transparency from our advisors.
  8. Explanation of all fees and costs charged to investors: Lack of transparency in fees and costs is the besetting sin of the financial industry. Whether it is direct charges of investment management fees, or indirect charges of brokerage, custodial charges, etc., investors struggle to know what they are charged. Paul narrated how he was helping his friend to understand expenses in his investment portfolio. He discovered that the highest expense was incurred in paying the financial advisor for advice!
  9. Confidentiality of information: Self explanatory
  10. Appropriate and complete records: Records must be detailed, exhaustive and accessible to clients.

Paul added that it was unusual for CFAI to directly deal with individuals, as it usually deals with businesses. However, the purpose of the event was to publicise the document among retail investors and the media, and to improve the manner in which investors are treated by advisors. Investors must pressure advisors and intermediaries to adopt these principles.

Deena next introduced Navneet, who spoke about Regulatory and Tax Arbitrage, which is exploited by financial intermediaries to pad revenues. He said that although markets have touched new highs, still Mutual Fund industry has lost over 18 lakh investors over the past 5-6 years. Same is the case with insurance and broking industry. This is mainly due to erosion of trust among retail investors. Unless investors are empowered, one cannot have a well-functioning capital market. He said that integrity means “doing the right thing when nobody is watching”. He emphasized Paul’s point regarding importance of disclosing conflicts of interest. He added that the new Companies Act would further empower investors. He further elaborated the 10 investor rights, and stressed the importance of IPS in determining investors’ objectives and constraints.

The floor was opened for Q&A with audience. Finally, Navneet gave a detailed and informative commentary on Indian equity markets and their correlation to elections. He spoke about how India can achieve Non-Inflationary Continued Expansion (NICE) and attract increased inflows of capital. He said that retail investors prefer physical assets over financial assets, which is disturbing. He said that markets are extremely forward looking and it makes no sense to time them. He also said that democracy has its own self-correcting mechanism, and that India is moving from caste- to class-based politics.

The event concluded with a vote of thanks followed by networking.

–        I C

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