Question

How do you understand the difference between a fiduciary model and a transactional, consumerist model of business–customer relationship? What reasons exist for the fiduciary model? Is there an ethical difference between the two?

Answer 1

Differences Between The “Fiduciary Model” and the “Transactional/Consumerist Model Of Business Customer Relationship

A Fiduciary model of the Business-Customer Relationship will work more on building a relationship with the customer and give less importance to the sales or profit figures. Such kind of business-customer relationship requires prudence and trust on the part of the business or fiduciary. The fiduciary relationship can be seen in business relationships including broker/financial advisor-clients relationships, and principal-trustee and beneficiary relationship, Board of Directors-company relationship, client-accountant relationship, as well as in the relationship between attorneys and clients. Fiduciary relationships involve both ethical and legal duties.

The Transactional or Consumerist model of a business-customer relationship signifies that there is no real relationship between the customer and the company, and the business is interacting with the customer only on a transactional basis. An example of a business offering/activity for a transactional model may include kiosks placed at the airport. A transactional model can also be reflected in other ways. For instance, certain business strategies only aim to maximize the volume of sales and do not aim to develop a relationship with the customer. For instance, a salesperson employed in a business that has adopted the transactional model will work lesser towards developing a relationship with the client, and will only try to gain more and more customers and enhance sales. Because mutual interest is not promoted, the ethics are compromised in this kind of business model. For transactional businesses, the responsibilities may only be limited to the legal aspects.

Reasons For The Existence Of The Fiduciary Model

A fiduciary often acts on behalf of another party or person. An example here can be the wealth managers that manage the assets of their clients. It is not merely a transactional approach and hence ethics should be followed to develop trust and to ensure the goodwill of all and promotion of client interests. Unlike the transactional model and relationship, a fiduciary has a “Duty of Care”. For instance, the Board of Directors is not merely responsible for completing their desk work but are required to provide directions that can guide a company to a prosperous future. Fiduciaries also have a “Duty to Act in Good Faith”, and therefore their actions should be serving the interest of the shareholders/client parties in the best way. The business model also reflects the “Duty of Loyalty” that a fiduciary has towards the client or the organization. Fiduciaries are required to abstain from all kinds of professional and personal dealing that can be a cause of conflict of interest.

Apart from these duties, there are also other reasons for the existence of a fiduciary model of business. Certain business activities and duties are not restricted to the fulfillment of transactions only. In these cases, success and client satisfaction only be achieved when ethics are followed and when mutual interests are promoted. For instance, a financial advisor cannot advise a client on investing in a fund that provides to the advisor the maximum broker percentage. The advisor needs to advise the client on the fund that can provide it the largest returns. Apart from the laws relevant here, the duties of the fiduciary are also guided by ethics and norms. Also, such a practice help fiduciaries retain their clients as trust is improved in the relationship and the clients wish to stay with an honest and sincere fiduciary for the longest of periods. The services (for instance wealth management) themselves are a reason for the existence of the fiduciary model, as their expert fulfillment requires a long-term relationship and trust, and not merely one or a few transactions.

The Ethical Difference Between The “Fiduciary” And The “Transactional” Model Of Business-Customer Relationship

Because the fiduciary model aims to develop long-term relationships, it cares more for the code of ethics, which may be necessary to improve on the trust factor. A fiduciary will always avoid conflict of interest and will always place the interest of the client before its own to succeed and stay relevant in the market. This may also confirm to certain theories of ethics. For instance, the Utilitarian Ethical Theory points out that action should maximize happiness and the good of all. Therefore fiduciaries acknowledge both legal as well as ethical duties.

On the other hand, a transactional model of business customer-relationship may only emphasize maximizing the gains for itself and will not prioritize the good of all. This will be a relatively unethical approach towards business when compared to the fiduciary model, as the business organization will always try to maximize the returns for itself and may also compromise on the interest of the clients while doing so. Unlike a fiduciary relationship, the transactional approach does not aim to serve the client in the best way, which is a compromise with ethics and norms. However, the nature of products or business offerings that are sold by businesses employing the transaction model of the business-customer relationship may not require a heavy emphasis on trust and duties including a duty of care, loyalty, and/or to act in good faith. The significance or value of the offerings may also be lesser here. For instance, a business selling bread may not value ethics that much, and hence will emphasize lesser on developing relationships and following ethics. It will try to enhance sales figures only while only ensuring that the laws are not broken. However, with increasing consumer awareness regarding sustainability and their own rights, and the introduction of more and more consumer and corporate laws, the span of ethics in business activities is only increasing with the passing years.