Advisor Speak

31st October 2009


Become immune to regulatory attacks

Brijesh Dalmia  
Dalmia Advisory Services, Kolkata  

Brijesh Dalmia – Dalmia Advisory Services, Kolkata – spoke at the Wealth Forum Platinum Circle Advisors Conference. Here is his prescription to get immunity from regulatory attacks…..

I would like to start with this quotation from the book “Good to Great” by Jim Collins. This was said by the founding president of Merck  & Co – one of the world’s leading pharmaceutical companies :

"We never try to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear."
            George Merck
            President - Merck & Co

I am a fan of this comment. It reminds me of my profession. We are in the business of advising our clients. If we do a good job in advising our clients, the profits will follow.


Conflict of interest is at the root of the problem

The key issue we all face today is that the regulator has changed the rules of the game and we are all trying to figure out what to do next. The genesis of this game changer – and the regulators and the Swarup Committee have spelt it out – is the conflict of interest of the intermediaries – the distributors and advisors. There is a perception that this conflict of interest is making intermediaries focus more on their own income rather than the clients’ interests. The 100 of us gathered here today need to reflect whether this is the case in our own businesses.  The regulators, the media – all of them seem to think this is indeed the case. Maybe the 100 of us here may not be guilty of this – but nevertheless, we need to bear the burden of the professionals who did not act in their clients best interests.

When we talk of conflict of interest, let me first make a disclaimer. I cannot say that I have always avoided conflict of interest.  It’s a journey that we must be prepared to make.  I can say I have moved. I have been in this profession for the last 15 years and over these years, I have seen and sometimes done the good, the bad and the ugly. I can say that I have moved on, I have realised from my mistakes, I have learnt from them and I am today a better person as a result of making the move.

Any activity that can influence the objectivity of the advice or the advisor is conflict of interest.  Advising based on the commission received from the manufacturer is the greatest conflict of interest. Pushing products based on sales targets, accepting gifts from principals other than small token gifts – these are all causes of conflict of interest.



Let me give you a recent example.  On Deepavali evening, I got a call from an RM of an insurance company who wanted to send me a gift in recognition of my contribution to insurance business in Kolkata.  I declined the offer – I didn’t know the RM, didn’t work for the company, and was not sure why the gift was coming my way. The same evening, the Vice President of the company called me and categorically stated that there were no obligations attached to the gift and requested me to accept it. I again declined – my ethics would not permit me to accept a gift – even token – from a company I don’t work for, don’t relate to.


Referral commissions

Accepting referral commissions without informing the client is also another serious conflict of interest. I am not against a referral system – we do have one in place in our company – but putting a referral system in place without the client knowing about it is wrong in my view. The challenge here is that many clients don’t appreciate a third party referee getting a part of the fees they pay, for the act of merely referring.  Dealing with such situations is a challenge.

In a recent case, we executed a large transaction for one of our biggest clients.  In one of the conference calls, I made it clear to the client that we had no interest in the transaction, that there were no commissions we were receiving from any involved parties and that if ever we had an income stream from prinicipals or other parties, we would let him know.  The client was extremely happy with this disclosure and suggested that he would be very happy for us to make some money for the efforts we were taking – so long as his overall costs were within a certain agreed level. We declined that opportunity to make some money – but I do know that with that client, I have no risk of losing his business for the next several years, because of this action of ours.


Profit sharing arrangements

Taking undue risks on clients portfolios due to profit sharing arrangements is another serious conflict of interest. Again, a disclaimer.  We have profit sharing arrangements with our clients – we’ve had them for 7 years now.  I do understand that there is a potential conflict of interest here. We are trying to get clients away from this system – its an uphill task as clients seem to prefer this model. But, we’ve been trying to explain to them the inherent conflict of interest, where the advisor can potentially seek to take undue risks in the client’s portfolio, in the quest to maximise returns and therefore his own profits.

These are some of the conflicts that are inherent in our business. I can say that I have been trying to minimise these conflicts – and the results have been extremely positive.


Convincing versus conviction

My friend Roopa told me that I speak her language – a lot of things that she has been saying for some time is exactly what I believe in.  Like the difference between convincing and conviction.  Convincing is when you are trying to push whereas conviction is something you know and which you execute. The moment there is convincing on our part without conviction, there is a conflict of interest. We must always be on the path of conviction.


How do you remove conflict of interest?

As I’ve said earlier, this is a journey – I don’t think we will reach a situation very soon where we can say we have completely eliminated all possible conflicts of interest – but we must undertake this journey with right earnest.


Commission disclosure

One important first step is disclosure of commissions received from prinicipals. I am happy to share with you that we have already prepared client letters which are being despatched to all our clients, where we have clearly spelt out all the commissions we are receiving from AMCs, including any special quarterly arrangements negotiated with AMCs or directly offered by them to us.  Why did we do this?  SEBI has made it mandatory – and while many advisors are still looking for some clarity, we thought it is much better to go ahead and implement it – it’s a good way to further win the trust of our clients if we are proactively implementing investor friendly guidelines ahead of all other advisors.


Customers want to know how much they are paying you

A study conducted by Wharton Institute found that over 60% of HNI clients (more than 1 million USD) were unhappy about the fact that they did not have clarity about how much their advisors were making on their portfolios. They didn’t know what they were paying and that’s what upset them – not the amount paid.

Our own experience with some of the new clients who we’ve signed on in the last month bears this out. When we explained the new regulations and our fee structures, they were comfortable – they said that as long as its all in black and white and they know exactly how much they were being asked to pay, they were ok with that.


Time versus trust

You will also find that once you remove conflict of interest, your client’s trust level will go up.  When that happens, the time spent on each client will reduce and therefore free up a lot of your time to take on more customers, more business.  When there is a lot of conflict of interest and trust levels are low, when you resort to a lot of convincing without conviction, you will find yourself spending huge amounts of time with every client.


Make yourself immune to regulatory changes

This is extremely important.  We have seen business models and revenue models going topsy turvy because of overnight regulatory changes. I asked Andrew yesterday about the way forward in such a scenario – he said that the only way forward is to gradually move to a fully fee based model – where nobody else other that you and your client will determine your compensation.

In our firm, we are moving in that direction, but are not there yet.  The fees we collect and the trail we receive perhaps constitute 75% of our revenues.  Upfront commissions constitute less than 25% of revenues. To that extent, the hit on our firm is more manageable. It might take us a few years to move fully to a fee based model – but we are committed to this path.  That is the only way you can become immune to regulatory changes that can otherwise change your revenue model overnight.

Regulators will not have an impact on you if you eliminate conflict of interest. You can then focus on building your business on a sound platform and gaining the trust of more and more clients.


And lastly….

I want to leave you with one thought – which I always share in presentations I make in Kolkata.  I started this business in Kolkata in 2000 – prior to that I had a sub-broking business in Patna. When I landed in Kolkata, people told me that to survive in the city, I had to pass back trail on liquid funds as well. I was clear I didn’t want to do that kind of business. From day 1, I focussed on no-pass back business. It took me six months to get my first deal – a Rs. 250,000 investment in Birla Income Plus, with a 0.5% commission.  Today, that client is a Rs. 10 crore client with me.

Clients with whom we began a relationship 8 years ago with a Rs. 10,000 HUDCO bond are now multi-crore clients.  Clients will always grow, some very fast, some not so fast.  If you win and retain the trust of your clients, you will grow with them and will also be able to add on more clients who these people refer.

Winning and retaining trust are the key to success. Removing conflict of interest is one of the best ways to win and retain trust of your clients.

We always want our customers to be loyal to us. We don’t want them to go to other advisors. But what about the other side of the equation?  Customers want somebody who is loyal to them.  Are you loyal to your clients?