Ethics and the Financial Planners

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Published on December 30, 2008

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Ethics and the Financial Planner © : Ethics and the Financial Planner © The Financial Planning Association® What is Ethics? : Ethics and the Financial Planner© What is Ethics? Main Entry: eth·ic 1 plural but singular or plural in construction : the discipline dealing with what is good and bad and with moral duty and obligation2 a : a set of moral principles or values b : a theory or system of moral values <the present-day materialistic ethic> c plural but singular or plural in construction : the principles of conduct governing an individual or a group <professional ethics> d : a guiding philosophy* Ethics is Situational : Ethics and the Financial Planner© Ethics is Situational Main Entry: situation ethicsFunction: noun: a system of ethics by which acts are judged within their contexts instead of by categorical principles* *Definitions are from www.merriamwebster.com Myths about Ethics : Ethics and the Financial Planner© Myths about Ethics Business Ethics is more a matter or religion than management. Our employees are ethical so we don’t need attention to business ethics. Business Ethics is a discipline led by philosophers, academics and theologians. Myths about Ethics : Ethics and the Financial Planner© Myths about Ethics Business Ethics is superfluous – it asserts the obvious: “do good!” Ethics is a matter of the good guys preaching to the bad guys. Business Ethics is the new police on the block Myths about Ethics : Ethics and the Financial Planner© Myths about Ethics Ethics can’t be managed. Ethics and social responsibility are the same thing. Our organization is not in trouble with the law, so we are ethical. Managing ethics in the workplace has little practical relevance. Benefits to Managing Ethics : Ethics and the Financial Planner© Benefits to Managing Ethics Attention to business ethics has improved our society. Ethics programs help maintain a moral course in turbulent times. Ethics cultivate strong teamwork and productivity. Benefits to Managing Ethics : Ethics and the Financial Planner© Benefits to Managing Ethics Ethics programs support employee growth and meaning. Ethics programs are insurance – they ensure that policies are legal. Ethics programs help avoid criminal acts “of omission” and can lower fines. Benefits to Managing Ethics : Ethics and the Financial Planner© Benefits to Managing Ethics Ethics programs help manage values associated with quality management, strategic planning and diversity. Ethics promote a strong public image. Formal Attention to Ethics – “It is the right thing to do.” Can Ethics be Taught? : Ethics and the Financial Planner© Can Ethics be Taught? Wall Street Journal - NO Socrates - YES Psychologist James Rest Adults can learn ethical problem-solving skills Changes are linked to view of society Ethical/moral education can influence reasoning Behavior influenced by moral perceptions Ethics and Planning : Ethics and the Financial Planner© Ethics and Planning Code of Ethics is what sets you apart Not all financial groups have this Provides guidelines Ensures fair dealing with clients Better in the long-run Case Discussion : Ethics and the Financial Planner© Case Discussion You are an investment advisor for a large financial services firm. As part of your job, you make decisions on where to invest millions of dollars in people’s retirement funds. In the process, you have become very successful , and your clients really seem to trust you. Case Discussion – cont. : Ethics and the Financial Planner© Case Discussion – cont. About six months ago you made, at least you thought at the time, a brilliant investment choice that should provide a sizeable return for your clients. Your boss let you make the call, but recommended caution. Case Discussion – cont. : Ethics and the Financial Planner© Case Discussion – cont. As it turns out, your boss was probably right. You have just received information that indicates an important patent application that the company was really counting on is going to be rejected. A friend at the company told you the news. The information is not yet public, and you are afraid that when the news hits the street … millions becomes thousands. Case Discussion – cont. : Ethics and the Financial Planner© Case Discussion – cont. If you sell the stock holdings right now, you should at least break even, and might even have a slight gain. What do you do? Case Discussion - Considerations : Ethics and the Financial Planner© Case Discussion - Considerations What are the problems? Case Discussion - Considerations : Ethics and the Financial Planner© Case Discussion - Considerations What are the problems? Clients will lose money if you do not act You may be breaking the law if you act Your reputation is on the line Your job may be on the line You really hate to lose your job Case Discussion - Considerations : Ethics and the Financial Planner© Case Discussion - Considerations What contributed to them? Case Discussion - Considerations : Ethics and the Financial Planner© Case Discussion - Considerations What contributed to the problem? You made a financial call that went bad You probably overcommitted or overweighted the portfolio You wanted a “grand slam home run” and the associated prestige The market worked against your decision Case Discussion - Considerations : Ethics and the Financial Planner© Case Discussion - Considerations Is there an applicable standard of right and wrong here? What are the options? Case Discussion - Considerations : Ethics and the Financial Planner© Case Discussion - Considerations Is there an applicable standard of right and wrong here? Insider trading = illegal (is it insider trading?) Fiduciary responsibility: work in the best interest of your clients. What are the options? Sell Don’t Sell Leave the Country Case Discussion – cont. : Ethics and the Financial Planner© Case Discussion – cont. What are the consequences of each option? SELL Case Discussion – cont. : Ethics and the Financial Planner© Case Discussion – cont. What are the consequences of each option? SELL Clients break even and/or profit You look like a genius If you are not investigated, nobody gets hurt If you are investigated, you could lose your job and/or go to jail You may lose your ability to work in the industry Case Discussion – cont. : Ethics and the Financial Planner© Case Discussion – cont. What are the consequences of each option? DON’T SELL Case Discussion – cont. : Ethics and the Financial Planner© Case Discussion – cont. What are the consequences of each option? DON’T SELL Clients probably lose a lot of money You may lose your job You probably lose prestige If you keep you job you may lose clients You may face arbitration and/or civil suits Case Discussion – cont. : Ethics and the Financial Planner© Case Discussion – cont. What are the consequences of each option? DON’T SELL Clients probably lose a lot of money You may lose your job You probably lose prestige If you keep you job you may lose clients You may face arbitration and/or civil suits LEAVE THE COUNTRY – ENOUGH SAID When All is Said and Done : Ethics and the Financial Planner© When All is Said and Done Look out for the best interest of the client “Golden Rule” works best in business IN THE END … It may come down to whether you can look at yourself in a mirror and know you have done the right thing. The CFP Board Code of Ethics : Ethics and the Financial Planner© The CFP Board Code of Ethics Focus on Ethics Updated Standards of Professional Conduct Effective July 1, 2008 www.CFP.net/certificants/ethics.asp Material Elements of the “Process” : Ethics and the Financial Planner© Material Elements of the “Process” Appears in the Rules of Conduct (1.2, 1.3, 1.4 & 2.2) Pivotal phrase that determines the terms of the client engagement that must be put in writing, the disclosures that must be made to the client in writing, and the duty of care that a CFP® professional owes to a client. Include but are not limited to: The client’s understanding and intent in engaging the certificate The degree to which multiple financial planning subject areas are involved. The comprehensiveness of data gathered. The breadth and depth of recommendations. Material Elements of the “Process” : Ethics and the Financial Planner© Material Elements of the “Process” Activities that may be considered to be material elements of the financial planning process: Conducting detailed data-gathering regarding multiple aspects of the client’s situation. Analyzing a client’s data and making wide-ranging recommendations. Providing investment advisory services defined by the SEC. “Not” Material Elements of the “Process” : Ethics and the Financial Planner© “Not” Material Elements of the “Process” Activities that may consider not to be material elements of the financial planning process: Broker completing paperwork to open an account. Acting as an order-taker for brokerage services. Engaging solely in sales activity related to insurance products. Acting as a mortgage broker without providing any other financial services. Teaching a financial class or continuing education program. Other “Standards” updates : Ethics and the Financial Planner© Other “Standards” updates Obligation to Prospective Clients Disclosure Obligations Written Agreements governing Financial Services Compensation Disclosures Obligations to the CFP Board Supervision of Subordinates Important Update – Rule 1.4 : Ethics and the Financial Planner© Important Update – Rule 1.4 Acting in a Client’s Best Interest Requires you “shall at all time place the interest of the client ahead of his or her own.” Rule requires CFP professionals who provide planning services or material elements of the financial planning process to do so with the “duty of care of a fiduciary.”

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