Introducing Cafemutual

Amit Trivedi of Karmayog Knowledge Academy draws upon recent events to illustrate the point that advisors need to have both competence and integrity to earn the trust of their clients.  

 J P Morgan Chase recently announced that in some derivate trades, they incurred a loss of US $ 2 billion. Just a few weeks back, the bank senior officials were maintaining that everything was in control and there were no serious losses on any of their positions. Suddenly, it seems, things went out of control and they announced such a huge loss. Jamie Dimon, the CEO of the firm, admitted in a statement that it was a stupid thing that should not have happened. They blamed it on errors, sloppiness and bad judgment. The internal controls, supervision and monitoring went wrong.

Recently, during one of my training programs, one mutual fund distributor came to me asking for suggestion. She had a small problem with most of her clients. Her clients were seeing losses in systematic investment plans. The losses definitely posed a problem, but the bigger issue was in communication and understanding. The advisor had assured the investors that if they invest in these schemes systematically, they would definitely earn handsome profits over a three-year period. She asked me what she should do.

Both these cases have a few things in common:

1. Initial wrong resulted in losses in the end.
2. Whereas in both the cases, one failed to assess or understand the risk correctly, the mutual fund distributor can claim ignorance, most will not accept that from the likes of Mr. Dimon and his team.
3. While J P Morgan lost its own proprietary money, in the latter case, it was the client who lost money. But then, in case of J P Morgan, it is not the trader’s or the management’s money, but it was the shareholder’s money.

When one is managing one’s own money, one has the right to take unlimited risks. But, when it is someone else’s money, there is a fiduciary responsibility and reckless risk-taking would be inappropriate. The recklessness could be the result of outright greed along with mala fide intentions or plain incomptence or misappraisal of the risks. Whatever the reason, the result is the same – someone loses money and the trust is lost.

It does not take long for trust to turn into rust.

Whether it is incompetence or mala fide intentions, the person who loses money does not take it lightly.

Trust means being able to deliver on the promise – explicitly stated or implied. This ability to deliver is a function of two things: the ability or competence and intentions or integrity. A successful advisor needs to have both – the right competence and highest integrity. If you keep the clients’ interests in mind, develop your capabilities – you have a bright future ahead.

It is also important to understand what competence one possesses and that the clients’ expectations are set appropriately. Setting expectations beyond what one can deliver could lead to disaster in the long run.