How we make money and why we are legally obligated to put your interests above our own

In this article

As a financial services firm, Elphinstone, Inc. – the company that owns and operates SmartRupee – must be able to command the respect and trust of its clients above all else. In order to do so, we have committed to upholding the highest ethical and legal standards in the financial services and investment management profession. 

One of the ways in which we choose to do so is by electing to uphold the fiduciary standard, and legally obligating ourselves to do so by becoming a Registered Investment Advisor (RIA) regulated by the United States Securities and Exchanges Commission (SEC), a process that the firm plans to initiate and complete prior to offering our services to any clients. 

The fiduciary standard means that Elphinstone will be binding itself to placing the economic interest of our clients ahead of our own. 

What does that mean in practice, and what does that mean for you? We will illustrate that with an example. 

Elphinstone is able to offer its service SmartRupee for free to its clients because it makes a commission from the asset management companies whose mutual funds we recommend to our clients. Those asset management companies pay us those commissions as a percentage of the management fees they charge our clients. In that sense, our clients are paying for the investment management services that SmartRupee is offering: we are just not charging anything extra, but instead sharing in fees that any investor would have to pay anyway to invest in a mutual fund. 

The potential conflict of interest arises when we may be tempted to recommend one fund to you that offers us a better commission for ourselves, and we use that higher commission as the basis of our decision to recommend you that fund, even if that fund is not necessarily the best fund for your needs, based on our own analysis. 

The fiduciary standard makes it illegal for us to do so: we cannot recommend a fund purely because it will result in a higher commission for us. Our recommendations have to be driven solely by what is in the best interests of the client. 

Why would we uphold this much higher standard? It is not just because we want to be an ethically, legally, and morally upright company. It is also because it is in our long-term interest to do so. 

Our business will thrive if people feel that they can trust us for advice, and that their money is safe when it is invested through our company. That will not happen if we sacrifice our long-term credibility for a few extra pennies in the short-term. A poorly performing fund in the short term might give us a little more in commission this year, but if our client then leaves us, we lose out on potentially decades worth of revenue from that client. If we recommend the right fund, even at a lower commission, we will likely retain their trust and their business for a lifetime. 

In other words, doing the right thing is good our business. We are not angels. We just understand our self-interest through a long-term mindset. Fitting, considering our business is to advise our clients on their long-term financial interests. 

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