While regulations govern how conflicts of interests between clients and financial-services providers need to be managed, firms only have one choice: Put the customer first, or eventually fail, writes Ola Leepile, CEO of Novare Holdings. 

The financial services industry is a hotbed of inherent self-interests that constantly pit clients’ needs against those of the business.

Effectively navigating the tensions between professional values and the economics of an organisation begins with a deliberate strategy to be fully transparent with customers right at the onset of the relationship.

The firm’s longevity depends on the success – and trust – of its clients.

A survey of U.S. adults by global research firm Morning Consult found that investment and wealth management companies experienced the biggest loss of trust among financial-services firms over the past year, as markets and economies experienced unprecedented uncertainty and volatility because of the coronavirus pandemic.

Traditional ways of building relationships through regular face-to-face interactions have also been disrupted by the Covid-19 outbreak.

Investors seek to grow their wealth or the pension fund assets they help oversee at the highest possible rate and lowest cost. The advisers or fund managers hired to help them reach these financial goals have an added responsibility: They need to make money for themselves or the firms they represent through consulting charges, commissions on product sales, performance fees, or increasing funds under management.

Many financial services companies run an array of operations, all under the same umbrella. These could include asset managers, private equity or real estate funds, investment consulting businesses aimed at big institutional investors, tied financial advisors targeting individuals, life and short-term insurance, banking or even brokerages. While cross-selling opportunities abound, so do the risks of not doing what is suitable for customers.

While South African regulations recognise the industry’s intrinsic conflicts, failing to communicate and regularly emphasise these to clients could lead to significant reputational harm, misunderstandings, or withdrawals.

The General Code of Conduct for Authorised Financial Services Providers and their Representatives requires that any personal interest that could lead to a potential conflict be avoided. Providers must disclose if, for some or other reason, this isn’t possible. All reasonable steps need to be taken to mitigate the conflict of interest to treat the client fairly.

These disclosures don’t invalidate the role of a financial-services provider. They are customary and generally accepted industry practices to ensure that an investor or the board of trustees of a pension fund are comfortable with the position of conflict. Trustees must ensure that the situation doesn’t undermine their governance structures and decide whether to go ahead.

Like most other financial-services companies, Novare Holdings has adopted a conflict-of-interest management policy, which, as its guiding principle, clearly spells out that the welfare of our clients must always come before those of the business. The group offers real estate funds with exposure to sub-Saharan Africa, impact investments, actively managed investments allocated to external money managers (typically hedge funds), and investment consulting across a range of asset classes.

A governing body appraises all contracts upon inception and regularly afterwards to ensure that the company’s different businesses operate objectively toward our clients, free from bias.

There are many situations where potential conflicts can arise. An unscrupulous asset manager could decide to make a profit or avoid a loss for the firm at a client’s expense, desire an outcome or service that clashes with the customer’s needs, or even favour one client over another.

Clients can guard against some of these risks by engaging investment managers as long-term partners, where clear roles and responsibilities for all parties are outlined right from the start. Investors should regularly assess their managers against their mandates, peers, benchmarks, and the set targets and metrics. Compensation structures must align with the financial goals of both parties, be transparent and easily understood by all.

Avoid financial-services providers that don’t have a conflict-of-interest management policy. Agreements must be open to regular scrutiny, with the ability to evolve to changing circumstances.

Policies are meaningless if not implemented and demonstrated in each interaction with a client – clearly and boldly, not in the fine print.

If an adviser recommends a group product to a client or board of trustees, the reasoning must be justifiable, comparable, and backed up by data. On the flip side, if an investment adviser believes a client will be better off by withdrawing funds from the group and placing these with another fund or manager, that person should feel empowered to do so without fear of backlash.

Financial-services firms exist because of their clients. Doing good by them is the most credible way of building a thriving savings and investments culture and a prosperous, sustainable business.