Conflict of interest is a big problem while advising – at least this is what the theory says. However I am talking about a slightly different problem. Conflict of what an adviser thinks a client should be doing, and what the client thinks he should be doing.

Let us take 2 different cases.

One is a 68 year old retired civil servant with a big huge pension. He is a widower and is childless. Thanks to some inheritance, and not having spent anything on children, he has a nice big rounded corpus. His assets include 3 houses – in 3 cities, one of which he is using and 2 are given on rent. He has a big mutual fund portfolio, and a small direct equity portfolio.

His expenses are about HALF the pension amount. He is OBVIOUSLY on the 30% tax bracket, he could not care a damn which nephew or niece got his assets, and he is willing to go (well that is what he says). He has a complicated portfolio and he refuses to simplify. I know one 80 year old who moves between asset classes – he hurt himself last time he went to the registrar’s office to sell a property.

Both these people are known to me and consult me from time to time (gratis of course) about some esoteric dollar denominated bond fund, or JM debentures, or Shriram Transport finance debentures, or a Long – Short Aif  – simply CHASING ALPHA.

Both of them do not have enough time to spend the money that they have, have other interests to attend to, and crib about the complexity of investing in India. One of them even said “If Vanguard were to be in India…” I showed them SBI Sensex ETF, a couple of new products from DSP, PPFAS – they are happy investing in them, BUT will NOT SIMPLIFY their investments. The 80 year old has a 70 year old wife who is far more practical. When this man (let us call him A) said “here is my will…and I will tell you how to handle the portfolio” she said “Oh it is very simple. I will ask Subra to redeem all funds, sell all equity, and put the whole thing into a liquid/ ultra short fund ..and do a SWP”. He was shocked. He looked at me accusingly “how can you simplify so much – what about inflation”. I showed him his net worth statement. It had more than 1 Million US $. Now tell me which Madrasi needs more than that age 74?

I seriously do not know why people chase ALPHA when they do not need it? any answers?

Now look at the advisors dilemma (the 68 year old invests directly, the 80 year old has an IFA). If I were their adviser I would be conflicted between “what I think is good for the client vs what the client thinks is good for him”. Now since I am a “free” adviser the conflict of interest of  my fee/ trail commission does not aris. Otherwise the IFA / RIA is conflicted for:

Fees, Complexity, what the client understands, what the client thinks, what the adviser thinks the client needs, the communication,…hey it is a difficult business!