Uberrimae fidei

A client tells an adviser everything: income, debts, family circumstances, fears. The adviser then recommends products the client cannot independently evaluate. The information runs almost entirely one way.

Uberrimae fidei is the principle the law applies to relationships built like that. It means utmost good faith — a higher standard than ordinary honesty. The ordinary commercial standard is: do not lie. This one is: do not withhold, do not profit at the other's expense, and do not exploit the trust that made the relationship possible.

The workbook introduces the phrase precisely where it belongs. The investment adviser is a person who acts on behalf of another to manage their financial assets, so there has to be a principle of utmost good faith (uberrimae fidei principle in Latin) and trust that needs to be followed.

Two prohibitions and three positive obligations. The prohibitions first, because they are stated as absolutes:

• There cannot be profit made at the cost of the client, and this has to be followed at all times.
• The adviser must not take unfair advantage of the client's trust. The workbook says this is at the heart of the fiduciary duty.

The obligations that follow from them:

• Full disclosure of all the facts. There cannot be any omission of details. The workbook is careful that this covers more than not giving wrong information — the correct information should have been disclosed. Not disclosing facts might lead to the client being misled, and that has to be avoided. Disclosure is absolutely essential where there is a conflict of interest, and should also be made where there can merely be a perception of one.
• Suitable advice. The exact requirements of each client vary, and the adviser has to give advice that would be right in that specific situation for that specific person — which requires proper study of the conditions relevant to that client.
• A reasonable or objective basis for the recommendation. Not a hunch, and not a house view applied indiscriminately.

The standard is familiar from insurance, where a proposer must disclose every material fact whether asked or not. The workbook imports the same idea into advice.

A client approaches an adviser with Rs 35,00,000 from the sale of a flat and a stated goal of buying another in three years.

The adviser recommends an equity-oriented scheme. Three facts are never mentioned:

1. the adviser's group entity would earn a distribution commission on it;
2. the scheme he selected is his own group's, and a comparable scheme with a longer record was available;
3. equity is a poor fit for a three-year horizon on money already committed to a purchase.

Nothing said was false. The scheme exists, the past returns quoted were accurate, the risk factors were in the document. Ordinary honesty was satisfied. Utmost good faith was not, on all three counts — omission, profit at the client's cost, and unsuitable advice.

Then the market falls 22% in year two.

The client cannot complete the purchase. The adviser's defence — that markets fall and the risk was disclosed in the offer document — answers a charge of misstatement. It does not answer the charge here, which is that the correct information should have been disclosed and that a three-year committed goal called for a different recommendation.

What utmost good faith required, concretely: say that a three-year horizon for committed money points to debt or a short-duration product; say that the group earns a commission on the alternative being suggested; and record a reasonable basis for whatever is finally recommended. The first two cost the adviser money. That is what the principle is for.

Chapter 19 (Ethical Issues), section 19.5 on the fiduciary responsibility of investment advisers, where the Latin phrase is introduced and then broken into full disclosure, suitable advice and a reasonable basis. Questions ask for the meaning of the phrase, ask which principle underlies the adviser's fiduciary duty, or present an omission and ask whether it breaches the standard.

• Utmost good faith is more than not lying. The workbook says expressly that it covers not only giving wrong information but failing to disclose what should have been disclosed. Omission is the breach that gets examined.
• The phrase is Latin and appears in the workbook as "uberrimae fidei". Recognise it in a question stem; it is not translated in the options.
• It is the principle; fiduciary capacity is the legal standing. One explains the other — the workbook uses the phrase to explain why the adviser is a fiduciary, not as a synonym for it.
• "No profit at the cost of the client" is absolute, and the workbook says it must be followed at all times. There is no threshold below which it does not apply.
• Perceived conflicts must be disclosed too, not only actual ones.
• Suitability is part of good faith, not a separate courtesy. Advice that is accurate but wrong for this client fails the standard.
• Its origin is insurance law, where the duty to disclose every material fact rests on the proposer. In advice the duty runs the other way — towards the client — and that reversal is worth holding on to.