Ethical Issues in Financial Planning


September 20, 2011 by Chris Nöthling

As a financial planner you are in a place where your actions can have far-reaching consequences – both positive and negative – for your clients. Consider some of the negative consequences of the following actions:

  • Losing or misappropriating client’s money;
  • Failing to show options to clients;
  • Pretending to have competence in an area;
  • Providing misleading or incorrect information / misrepresenting information; and
  • Placing the advisors interests above that of the client.

When I became a financial adviser ten years ago, these issues were furthest from my thoughts at the time but regrettably I have witnessed inappropriate behaviour from advisors on occasions. To be fair I truly believe that many advisers are doing the best they can by their clients. But every once in a while ignorance or misguided self-interest gets the better of an otherwise well-intentioned adviser.

During the last few weeks I have heard two commentators reflecting on the Financial Planning Industry not yet transformed to the Financial Planning Profession. One of the differentiators they made reference to was the Ethics of the Financial Planning domain. Ethics involves moral values and behavioral standards of business people as they conduct their business. By definition then ethics involves human conduct and revolves around whether this conduct is “good or bad”. Ethics lies at the heart of what the financial planning’s professional responsibilities are to the public, to clients, to colleagues and to employers.

Principles of Ethics

During my initial training as an adviser I recall that we covered principles of ethics that I think are relevant and worth reiterating. They are:

  • Integrity: The financial planner should behave with integrity and avoid objectionable, harmful, or unseemly behavior.
  • Objectivity: The financial planner should be objective in providing services to clients. The financial planner should give clients products or services, which best meet the client’s needs, with specific reference to the client’s personal financial circumstances and in the best interest of the client.
  • Competence: The financial planner should keep up a high level of professional knowledge and skill in order to advise clients. The financial planner should give advice and service on areas only where the financial planner is knowledgeable and technically competent.
  • Fairness: The financial planner should offer services in a way that is fair and reasonable to clients, principles, partners, and employers, and should disclose any conflicts of interests in providing such services.
  • Confidentiality: The financial planner should honor the confidentiality of all information received from clients. The financial planner should not disclose any confidential client information without the specific consent of the client.
  • Professionalism: The financial planner should behave in a professional way at all times. The financial planner’s conduct should reflect credit upon the profession.
  • Diligence: The financial planner should apply him / her self with due skill, care, and diligence.

Ethical Tests

Advisers live in the real world and every so often they find themselves in situations which are not clear-cut; where the boundaries are blurred and where they are not sure where the ethical “true north” lies. The concept of ethical tests provides a reality check for these situations. They offer a quick and easy benchmark process to guide you in responding to the situation. Three typical ethical tests are described briefly.

  • The professional ethic test: How would a disinterested panel of professional colleagues view your actions?
  • The television test: Would you feel comfortable explaining your actions to a national TV audience?
  • The family test: Would you feel comfortable explaining to your spouse and children why you took this action?

Concluding Comments

Last week we spoke about Customer Loyalty and the Customer Loyalty Ladder. Running your adviser business with unquestionable integrity is an integral part in building customer loyalty. In fact we could go one step further and say that building a successful financial planning practice is dependent on building a relationship of trust with clients. Ethics and trust are the basis on which a financial planning business is founded. Next week we will explore the concept of trust: what is it and how do we build it?

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3 thoughts on “Ethical Issues in Financial Planning

  1. Keith Mason says:

    Excellent points once again.

    Wouldn’t it be nice if everyone behaved in this fashion all the time?

  2. [...] Ethical Issues in Financial Planning ( [...]

  3. [...] 9.   Ethical Issues in Financial Planning [...]

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