Ethics & ethical restraint • Importance of ethical conduct • Ethical issues for IAs • Ethical dilemmas • Fiduciary responsibility • SEBI Do's & Don'ts • Annual audit observations • Global best practices
Ethics = moral principles/rules of conduct that guide behaviour affecting others; from the Greek ethos (custom, habit, character). Fundamental ethical principles: Honesty Fairness Diligence Care Respect for others
Being legal is not the same as being ethical. Ethics goes beyond the law into right/wrong behaviour rooted in a person's values and character. E.g., an adviser who gives no after-sales service may be acting legally but is violating ethical principles.
The intermediary's core role is channelling savings into suitable investments — helping issuers raise resources and helping investors earn reasonable returns. "You can have everything in life you want; if you will just help other people get what they want." — Zig Ziglar
| # | Issue | Illustration / Resolution |
|---|---|---|
| 1 | Lack of focus on client-specific needs | Selling Small Cap Funds to senior citizens; risk profiling is a must |
| 2 | Lack of product understanding (esp. risk & suitability) | Arbitrage Funds wrongly sold as Liquid Fund substitutes — check drawdown/volatility track record |
| 3 | Lack of market/product-universe knowledge | Selling Small Cap Funds when the segment is rallying without perspective |
| 4 | Wrong practices — churning (frequent switching for commissions) | SEBI mandates IAs cannot distribute, to curb this conflict |
| 5 | Not disclosing risks; highlighting only positives (misrepresentation) | Distress Debt AIFs carry high default risk — must be communicated |
| 6 | Poor after-sales service / deviating from promises | Erodes trust over time |
An ethical dilemma arises when a person must choose between two alternatives, neither clearly superior — the choice reflects (and signals) the person's ethical standards.
A client doesn't need a particular service but doesn't know it. Adviser can (a) push them through it and earn a fee, or (b) tell them it's unnecessary — (a) earns revenue, (b) is ethically correct.
Sign up many clients (risk of poor service) vs. grow slowly (risk of an unsustainable business). Either path involves some compromise.
An adviser personally favours low-cost term insurance, but their organisation incentivises selling higher-commission ULIPs/whole-life policies — a values clash that must be navigated.
A distributor pushes a consistently underperforming fund (or ULIPs/equity funds to elderly clients) due to higher commissions — must be evaluated on suitability and avoided if unsuitable.
In today's social-media world, clients encounter many ethical and unethical opinions on investments — the adviser's duty to justify their advice with clarity becomes even more important.
An IA is a fiduciary — bound to act in the client's best interest, governed by the principle of uberrimae fidei (utmost good faith). The adviser must never profit at the client's expense or take unfair advantage of their trust.
All material facts must be disclosed — no omissions or misleading half-truths. Especially critical where conflicts of interest exist or could be perceived to exist.
Advice tailored to each client's specific circumstances, requiring proper study of their conditions — not a one-size-fits-all approach.
Recommendations must rest on sound reasoning serving the client's goals — never on factors that benefit the adviser.
The assigned work must be carried out faithfully and free of conflicts of interest.
IAs must undergo a yearly compliance audit conducted by a Practising Chartered Accountant. Any material audit observations must be disclosed to clients — reinforcing transparency and accountability as an extension of the adviser's ethical obligations.
Registered advisers must disclose financial conditions impairing their ability to meet commitments and material disciplinary events (past 10 years), and adopt written risk-identification policies.
Advisers must act with competence, honesty, integrity and fairness, satisfying the "best interests" standard. Penalties include bans and disqualification. Steps to satisfy the standard:
1. The "Client First" principle in ethical advisory practice essentially means:
2. "Churning" — frequently switching a client's investments to generate commissions — is best described as:
3. In an ethical dilemma, the options available to the investment adviser typically:
4. Which of the following is NOT one of the four pillars of an Investment Adviser's fiduciary responsibility discussed in the chapter?
5. Per SEBI's Do's and Don'ts, an investor should: