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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Ethical Issues

Caselet: An adviser charges fixed annual fees of Rs 30,000 under a signed agreement. Midway through the year, the adviser also accepts a Rs 12,000 referral payment from a product issuer for steering this client into its scheme, without telling the client. Which statement is correct?

It is unethical. An investment adviser should be paid only the agreed fee by the client and should not take undisclosed payments from product issuers for advising that client. Such side payments compromise independence, and neither their small size nor positive returns makes them acceptable.

  1. AAcceptable, as the fee agreement already covers the adviser's remuneration
  2. BAcceptable if the amount is below the annual advisory fee
  3. CAcceptable if the client's returns are positive
  4. DUnethical, since undisclosed side payments from product providers compromise independence and fee-only adviceCorrect

Explanation

Advisers under the regulations must avoid receiving consideration from product issuers for advice to the same client and must keep advice independent. Remuneration is only the agreed fee from the client. The size of the payment or the returns achieved do not cure the breach or the non-disclosure.

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