Question

The financial industry frequently experiences scenarios in which individuals (agents) act on behalf of an investor or client (principals). The corporate form of ownership explicitly relies upon this institution with the Board of Directors and management acting on behalf of stockholders. Increasingly, many personal finance transactions also rely upon the use of intermediaries who act on behalf of customers, such as mutual fund managers, investment advisers, insurance agents, or stock traders. This relationship can create conflicts in which the agent does not act in the best interest of the principal.

• What do the verses listed above suggest about the likelihood of these conflicts?
• What is the ultimate source of the conflict? In other words, what causes individuals to act in a manner that is not in the best interest of the principal?
• From a financial perspective, what safeguards could be pout in place to protect the principal?
• When a principal is harmed, what recourse should be taken? What is a Christ-like response to these situations?

Answer 1

The likelihood of Conflict arose from the personal judgement that investment manager would have to take on behalf of his client. There is biasness involved. The Personal Financial Benefit such as Placing personal order before cliecnt's order to gain benefit from price hike or Negligence on Part of Manager such as before investing into a security manager is expected to anaylse the risk and reward involved. But instead of Analysing the Investment manager relies on his friend's Jugement can lead to conflict of interest between Client (Principal) and Manager and manager may not be able to act in best interest of Principal.

Safeguards:-

1. Principal must not give full rights to investment manager rather Principal should be asked before any decision making.

2.Avoid Providing financial advisory services for any transaction to two competing interests

3. Transparency, full disclosure, and being pro-active in handling potentially problematic situations are the keys to successfully managing conflicts of interest.

Recourse when Principal is harmed:-

1. When Principal is harmed, Regulator should impose heavy penalty on Manager.

2. Suspension of Manager's License to work in Financial Industry.

3. Regulatory Action must be taken on the firm in which such manager is working.

Thanks! Regards!