Ethical issues of financial advisors

Honest financial planners may face real dilemmas when trying to do the right thing for their clients. Investment professionals may face some common dilemmas, but there is also guidance on how to resolve these dilemmas.

Key points

  • Financial advisors manage assets and money affairs for individuals who usually lack knowledge and proficiency in the market and finance.
  • This opens the door for bad actors to take advantage of unsuspecting customers, leading to unethical behavior.
  • Some ethical issues revolve around placing clients in appropriate investments that may not generate as much income for consultants.
  • Many certification bodies and regulatory agencies have implemented ethics and compliance standards to help keep consultants upright.

Today’s ethical issues

A generation ago, tax laws and available financial products and services were simpler than they are today. For example, if someone wants to buy stocks, the stockbroker will trade. If someone needs permanent life insurance, a whole life insurance will be issued. But now, planners must decide whether this traditional method is better, or whether it is better for customers to purchase any number of other available products. Likewise, customers who insure general variable life insurance may actually have a better life in their lives.

The problem extends to investment. Putting customers in the right investment portfolio means evaluating and adhering to the customer’s risk tolerance and time frame. A 70-year-old client should normally not own 90% of growth stocks, even if she insists. Even if an investment is appropriate in terms of risk, ethical issues also involve costs. Perhaps there is a S&P 500 index fund selling it to a broker which is burdening clients. At the same time, there are several no-load S&P 500 index funds and low-cost ETFs that will provide customers with the same market exposure at a lower cost-even if it means that advisors are paid much less. The needs of customers must be put first.

The modern product maze means that every financial planner faces an ethical dilemma when doing the right thing for the client.

Ethical standards of professional consultants

In view of these difficulties, the Certified Financial Planner Standards Committee has made major revisions and upgrades to the ethical requirements of its licensees, such as the trustee requirements in 2007:

  • All financial planning services must be taken care of by a real trustee, not just acting in the best interests of the client. This also constitutes a major advancement in liability, as the trustee has a strict set of rules and guidelines that must be followed at all times. For clients, this means that their planners must comply with a higher standard of legal care than before.
  • The CFP Committee broke the trustee’s standard of prudence and emphasized how investment advisers and broker-dealers previously complied with different standards: -dealers) may or may not be financial advice in the best interests of clients (according to legal requirements for investment advisers) ). “

The CFP name is not the only name that defines the ethical standards to be followed by its members. CFA holders must also learn and maintain a set of ethical standards, and the Financial Industry Regulatory Authority (FINRA) also outlines prohibited practices.

Fees and commissions

No matter what laws or ethical standards they comply with, one of the biggest ethical dilemmas faced by planners is choosing compensation methods. The compensation methods for sales-driven practitioners and planners are often interchangeable, because everyone can charge fees or commissions for their services.However, for planners who must choose one compensation method over another, this flexibility often creates moral dilemmas.

Toll plannerA person who charges a customer based on a percentage of the customer’s assetsOnly by increasing the customer’s assets will increase his or her compensation. If the planner charges the client a 1% fee for managing assets, then the annual fee charged from the $100,000 portfolio will be $1,000. Therefore, if the planner can grow the investment portfolio to $150,000, his or her compensation will increase accordingly. Compared with traditional commission-based brokers, this type of compensation can motivate planners to adopt more aggressive investment strategies.

On the other hand, commission-based planners will be compensated for every transaction, regardless of portfolio gains or losses. These brokers face the temptation to use trading as a means of income, even if they manage to avoid the technical definition of “churn.”

In this sense, each type of compensation has its own set of moral issues. In the final analysis, no matter what business model is used, planners must be willing to put their own interests under the interests of their clients. Take, for example, planners who can charge by the hour or on a commission basis.

If the planner meets with a client who has US$2 million for retirement, the hourly fee will result in a total cost of US$5,000At a very high end. On the other hand, choosing to charge clients a commission fee for investing $2 million in variable annuities may pay up to 7% in commission, which will earn the planner $140,000. Even the most determined planner can easily shake this extreme difference in pay. The key to remember is that you must act in the best interests of your customers, not for your wallet.

Sales and advice

As new business platforms and methods continue to emerge, the boundaries between sales and consulting in the financial industry have become increasingly blurred. This usually boils down to getting the customer to do the right thing for the right reason.

Many clients will make financial decisions based on emotions rather than the planner’s recommendations. Suppose a 60-year-old woman deposits all her savings of $100,000 in a certificate of deposit (CD) and is afraid of taking risks with her principal. If she lives another 25 years, her savings will likely be exhausted long before her death, because these low-risk investments have a small rate of return and will be offset by inflation over time.

As a planner, you obviously need to allow your clients to diversify their holdings through reasonable asset allocation, or at least consider some direct annuity option. But to what extent should you encourage her to do this? To help this customer, can you use aggressive, fear-based sales strategies, or even slightly distort the facts?After all Yes Do it in her best interest. In addition, if you do not take any action, you may be liable for failing to provide sufficient advice.

In this case, the definition of a “fear-based” sales strategy is also somewhat subjective. If the planner shows the client a graphic showing how she will go bankrupt in less than 10 years, is this using fear as a strategy, or is it just a revelation of reality? It can be said that these two exist at the same time.

Fortunately, planners can really help in these types of situations. If the client refuses to accept your suggestion, you can provide them with a written disclaimer stating that the client or potential client refuses to follow the planner’s suggestion. If your 60-year-old customer wants to insist on using her CD and she signs this disclaimer, then you know.

system error

The truth is that there are no core ethical resources available to all types of financial planners.Commission brokers can consult their supervisor or compliance department on certain matters, but many of their questions are likely to be answered by the “company”It may allow planners to create answers to profitable transactions without taking responsibility, but it may not be able to solve the problems that are truly most beneficial to the customer.

CFP practitioners can consult the CFP committee on ethical issues, and other approved planners may also have codes of ethical conduct for reference. However, for all practical purposes, non-certified planners basically rely on their own, because the rules imposed by regulatory agencies are not designed to solve many of the daily problems that planners face in their work.

Bottom line

Although legislation and regulations aimed at curbing unethical behavior are heavily criticized (such as the Sarbanes-Oxley Act of 2002),Financial planning in the world today is more dependent on understanding the personal situation and goals of customers and willing to do the right thing for them. The correct application of ethics in modern financial planning essentially boils down to letting customers know exactly what they are doing and why, and fully understand the costs and risks involved.

Ethical transactions happen to customers real Understand the consequences of the consultant’s advice and be willing to move on, provided that all relevant laws and regulations are complied with. After all, morality can still be seen as simply knowing what is right and then doing it.


READ ALSO:   Recession Rich
Share your love