Question

Case Study: Orpheus Financial Advisors

Orpheus was an extremely successful, and very well respected financial advisory firm with offices throughout the United States. Orpheus had a reputation for well-trained advisors and was known to be very selective in terms of the investment managers they would recommend to their clients. As a result, Orpheus clients tended to stay with the investment choices they were recommended for an average of ten years. The average for other platform managers was less than five year. As a result Orpheus was a very desirable platform for firms to get their funds placed on. Traditionally, Orpheus employed a commission based system to charge customers for its advisory services. That is, customers would be charged for specific securities transactions executed on their behalf. Mutual fund transactions would be paid by the fund family based on the initial sales charge of the fund in question. In 2005, Don Shipman, the Senior Vice President of sales convinced Orpheus management and board to also offer investment advisory services on an asset fee based system. Clients would be charged a fixed percentage of their assets under management no matter which or how many transaction they generated. Management and the board approved and the new program was rolled out late in 2005. The new program became immediately very profitable. Branch offices enrolled a large percentage of new customers in the fee-based rather than commission-based program and many existing commission-based accounts were converted to a fee-based compensation system. Shipman and Daryl Greene, the Chief Compliance Officer, agreed that this new business vehicle did not require any addition supervisory systems or written procedures. They continued to rely on their existing supervisory system, which was directed towards its commission-based business, nor did they monitor their fee-based accounts for transaction activity. In 2007, a client, Rose Garcia, seeing the fees applied to her account increase substantially complained to her Orpheus rep. He explained that her account was now being charged under the fee based system which the rep asserted was appropriate for her portfolio and investment profile. Rose was very conscientious and had all of her statements and activity reports for 2006 and 2007 and on reviewing them confirmed that she had made no trades during those years. She was a conservative, buy and hold investor.

1. Identify the principal actors

2. Identify the stakeholders

3. Determine if there have been ethical or regulatory breaches and what principles have been violated.

4. Determine if there has been material harm to any stakeholder and what steps are required to mitigate or correct it.

5. Discuss any other issues of ethics, compliance or good governance that extend beyond the immediate details of this case.

Answer 1

1. Principal actors

In the present case,the principal actors ,are the client, Rose Garcia & the representative of Orpheus Financial Advisors, the financial advisory firm .

2.The stakeholders are all the clients of Orpheus ,who come for financial advisory services.

3..

Firstly, as per its advisory services motto,Orpheus was charging only commission as its fee for the advise/knowledge shared with its clients.Basing its fee as a percent on the value of the securities purchased , just like asset management companies ,is outside its scope ,as defined,accepted & believed by its clients.

Basically it is a violation of professional code of ethics, where by ,the company is switching over to what was not agreed with the client .

Secondly, this is bound to create conflict of interest, in that an advisor about the asset cannot also manage that particular asset/security.

The latter leads to regulatory breach .

4.. The harm to the clients is that the company may not be in a position to offer unbiased opinion as before ,if it takes up the role of a portfolio management company.

The only way to correct the anamoly is to segregate both the functions of financial advisors & portfolio/asset managers & also give the existing clients, the option of continuing or leaving   any one of them--so that they take a well-considered decision ,whether to associate themselves with Orpheus or not ,in their new & revised orientation.

5.Ethics & good governance is to make known, both the existing & potential clients,the shift in the business intentions of the company --and give them the opportunity of choices in the market --be transparent about their motives ,with clear-cut agenda for growth,so that both sides benefit.