8 Broker’s Code of Ethics

It is no secret that the investment industry is plagued by embarrassing and seemingly unresolvable conflicts of interest. Brokers want to earn commissions and often face great pressure to do so. But what brings the most benefits to brokers is not always what is best for investors — or what they really want. The temptation is to sell products that are too risky because they are more profitable than low-risk alternatives.

Although everyone must work hard to earn a living, including brokers, deliberately mixing or mis-selling in any way is not only unethical, but may also trouble the broker again in the form of a deteriorated relationship or even a claim. Brokers should avoid some obvious things: lying, misrepresentation, and hard-line marketing strategies. However, some unethical behaviors are more subtle, but even less acceptable.

Typical unethical broker behavior

Before entering the code of ethics, it is important to understand some of the different and typical unethical broker behaviors that may occur. These taboos are interrelated and form the core of the problem. All types are accompanied by poor or inadequate communication, a tendency to mislead investors, or simply not wanting to do a good job. To a large extent it is related to the use of information asymmetry between buyers and sellers.

Half-true (Or one-quarter truth or three-quarter truth)-One of the most insidious temptations of bad intermediaries is to confuse truth with falsehood. For example, a broker can tell clients that they are observing the market every day, which means that appropriate actions will be taken based on market developments and events. However, if the fund manager is actually just observing, then the client is misled.

Insufficient explanation- Some brokers do not bother to explain things at all, they would rather their clients not know too much. One branch of this is “blind science”. By talking about internal rates of return, long phnom penh futures, options, currency derivatives, and countless other financial terms in the customer’s mind, you can fascinate and impress customers.

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Cautious silence– For example, for brokers selling structured funds, it is very tempting to praise the built-in protection and guaranteed returns it provides. Especially now, investors like security, coupled with (reasonably) generous returns. But if this is at the expense of all dividends, then investors really have to be told this. There is no way to take it for granted or assume that they know.

No substitutes are provided- From an ethical and legal perspective, inexperienced clients are especially unable to make meaningful decisions unless they know other options. There are many, many investments there. If a broker offers a specific fund, or even a combination of multiple funds, to novice investors with a “this is right for you” attitude, then they will not provide the best service. Even if the offer is actually appropriate, investors should have other options. At the very least, the broker should point out to the client that this is only a suggested option, and that similar returns can be obtained in many different ways with similar risk levels.

1. If you have any questions, please make it clear

If you even find that investors may need or want to know something, please tell them. Never succumb to the urge to remain silent, even if you know it might cost you.

2. Do to others

Put yourself in the position of investors. If you don’t want to be processed in a certain way, please do not deal with others. The most important thing is to avoid deceiving yourself and others. The best test is to ask yourself if you want your mother, brother, best friend, or even yourself to own these investments.

3. Avoid one size fits all

Everyone has different needs, preferences and circumstances. Therefore, they need a portfolio that truly suits them. Each communication sent should be tailored to individual customers. For customers, there is nothing more useless than a standardized quarterly letter containing general information they can get from the Internet or financial television. Most customers just ignore them. What customers need is customized information about their own portfolio, how it works, why, what changes you plan to make, etc.

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4. Ask your customers, don’t expect them to know

If the customer doesn’t realize this is necessary at the beginning, they won’t ask for clarification. Make absolutely sure that the customer knows what they get. They don’t need to know every complex detail, but they definitely need to know, at least, how risky the product is relative to the possible return. For careless and trustworthy investors, there should be no surprises.

5. Clarify market conditions

You should have general discussions about specific asset classes with your customers. This does not mean trying to time the market, but investors should know whether the market has prospered for many years and is considered likely to be overvalued, or the opposite.

Similarly, if people say that commercial real estate is likely to have reached its peak, please tell the client. It is not wrong to say that “the opinions are divided and there may be any results.”But there is Yes It is wrong to remain silent about potential disadvantages and risks in order to drive sales.

(For more information, please read Fatal flaws in major market indicators.)

6. Explain the monitoring

Customers should know how often you monitor their investments and what this really means. For example, if there is news in the media that there may be a problem with an asset, would you call the customer? This also applies to positive new opportunities that may arise. If all you plan to do is to check your asset allocation once a year, that might be fine, but customers need to know that they can’t expect more from you.

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7. Show customers how things work

The classic multicolor pie chart with a combination of high, low, and medium risk asset classes is an excellent way to show the essence of the investment process. Similarly, the “risk pyramid” shows how one can move up from a low-risk cash base through bonds to equity funds, etc., and should always be the starting point of the consulting process.

8. Interpretation reports and research

Just sending reports to your customers via email is not enough. It is very likely to be difficult to understand, and it may not even be read. Understand the main points with the client to ensure that they truly understand the main elements of the investment and the meaning of the text. People on the street don’t know the meaning of phrases such as “optimize portfolio risk”, “industry allocation”, and “overweighted mid-cap”.

Similarly, ordinary investors usually do not understand the meaning and impact of long-term investment and short-term investment, or the difference between investment styles such as value and growth. The best (and lowest) level of communication and understanding is essential for good brokerage best practices.

Bottom line

Investment ethics is essentially about two interrelated things: giving customers good advice, and then making sure they understand it. What you and/or the asset provider can and cannot do must be completely frank and open. It is also important to ensure that customers can see recommendations and products in context-and that context extends to relevant markets and other potential investments available.

Over time, good communication and complete honesty will bring rich returns, positive customer relationships and frequent word-of-mouth recommendations.

(If you decide to ignore this suggestion, you should take a look Regulating the Securities Market: An Overview of the US Securities and Exchange Commission.)


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