by Uzi Rosha
At the heart of the adviser-client relationship is the fiduciary standard, which obligates advisers to act in their clients’ best interests. It is fundamental to preserving trust and ensuring the integrity of the advisory relationship. This duty extends beyond mere disclosure and requires a proactive approach to managing conflicts. Conflicts of interest are pervasive in the advisory industry, particularly for private fund advisers. By identifying, disclosing, mitigating, and avoiding conflicts of interest, investment advisers can align their practices with regulators’ rigorous standards and protect the interests of their clients. However, it is not always the easiest responsibility to fulfil.
Enforcement actions reveal that even well-documented disclosures are insufficient if conflicts are not adequately mitigated, particularly in several key areas:
- Fee and Expense Allocation: Improper allocation of fees and expenses between funds and affiliated entities remains a significant concern. Advisers must ensure transparency and fairness in cost-sharing arrangements to avoid regulatory scrutiny.
- Preferential Treatment: Providing certain investors with preferential terms—such as exclusive access to co-investment opportunities or favourable redemption conditions—can create inequities. Advisers must disclose these arrangements comprehensively to all investors.
- Affiliated Entities: The use of affiliated service providers or investments creates inherent conflicts. Regulators are particularly vigilant when such arrangements lead to excessive fees or disadvantage fund investors.
- Allocation of Investment Opportunities: The unequal distribution of lucrative opportunities—favouring accounts in which the adviser has a financial interest or prioritising high-performing clients to maximise fees—has triggered enforcement actions. Fair allocation policies are essential to maintain investor confidence.
- Undisclosed Third-Party Arrangements: Advisers must be transparent about any financial benefits derived from third-party relationships. Undisclosed agreements with service providers or sponsors often lead to significant penalties.
- Misleading Valuation Practices: Advisers must adopt fair and consistent valuation methodologies. Inflating fund performance to attract new investors or increase fees undermines trust and invites regulatory action.
- Insider Trading and MNPI: Advisers with access to material non-public information (MNPI) through board seats or other roles must implement stringent controls to prevent misuse. Failure to address these conflicts can result in severe enforcement outcomes.
To align with expectations, investment advisers should adopt a systematic approach to managing conflicts, which include:
- Regular Reviews: Conduct thorough evaluations of business practices, compensation structures, and relationships to identify potential conflicts.
- Tailored Policies: Develop customised procedures to address the unique risks inherent in the firm’s operations.
- Client-Centric Disclosures: Use clear and concise language to communicate conflicts, ensuring clients are well-informed.
- Ongoing Monitoring: Periodically update compliance frameworks to reflect changes in regulatory expectations and market conditions.
- Third-Party Assessments: Leverage independent reviews to validate compliance efforts and identify areas for enhancement.
Importantly, investment advisors must move beyond manual processes to manage conflicts of interest, recognising that such an essential and high-risk area demands more robust and efficient solutions. A compliance department’s reliance on spreadsheets, emails, and fragmented workflows increases the likelihood of oversight, inconsistency, and non-compliance.
By embracing innovative technologies, firms can leverage workflow automation, centralised information-sharing platforms, and artificial intelligence (AI) to systematically identify, monitor, and address conflicts of interest. These tools enable real-time tracking, comprehensive data analysis, and predictive insights that help firms proactively mitigate risks. Not only do these technologies enhance operational efficiency, but they also provide transparency and accountability, addressing the heightened expectations of both regulators and investors. Implementing such solutions demonstrates a commitment to excellence and integrity, positioning organisations as leaders in compliance best practices.
The author, Uzi Rosha, is the founder and CEO of One-Compliance.
