Ethics in the Financial Planning Industry

Famous author Samuel Johnson said, “Integrity without knowledge is weak and useless, and knowledge without integrity is dangerous and terrible.”

The recent collapse of some of the biggest names in the financial services industry was testament to this thinking. While part of the blame for the financial crisis was placed on the lack of a strong regulatory framework, it was largely a result of management lowering ethical standards. This included performance evaluation and incentive structures that led to the sale of risky and inappropriate products without needing to prove sustainability, coupled with weak oversight, reporting and disclosures. The events also shattered a common myth that as long as you’re not breaking the law, you’re ethical.

The cost of ethical failure is usually more than just regulatory fines and lawsuits. It leads to a loss of image and reputation, increased supervision by internal functions and government agencies and even to demoralization and loss of employees. On the other hand, companies that have consciously invested in developing a strong ethics program have actually seen benefits by attracting like-minded employees and business partners. Sales in this industry are directly linked to trust – so the stronger the company’s image, the higher the turnover in the long run.

The dictionary meaning of Ethics is “The rules or norms governing the behavior of a person or the members of a profession”. Ethics in financial planning can mean several things, many of which are not precisely defined by law, such as acting in the best interest of the client by providing objective and honest advice, full disclosure of risks and benefits, and transparency, fairness, and professionalism in all business transactions, whether product design or customer service.

There are many elements involved in creating an ethical organization. A few that come to mind are:

Company Values: Values ​​and expected behavior set the tone for everything a company does. But it is important to constantly communicate these through real life examples and most importantly through consistent behavior from senior management.

Policies and Training: Create policies that document purpose, procedures, roles and responsibilities, reporting requirements, and sanctions for non-compliance. Reinforce company culture, code of conduct, legal and regulatory obligations and policies through training.

Integrate transparency and fairness into product design, sales literature, advertising, and all customer communications

Reward and Recognition: Make sure the incentive structure rewards the behavior you want to encourage and include values ​​and ethical components in performance reviews.

Build strong risk management, controls and audit programs to ensure issues are anticipated or highlighted in a timely manner.

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Whistleblower protection: Create easily accessible channels for employees to escalate issues and provide a robust process for investigating and handling such complaints. Protect confidentiality to the extent possible and ensure that whistleblowers are not retaliated against. To ensure that employees have confidence in the process, it is equally important to act quickly and concretely against offenders. This also shows how serious the company is about integrity.

The financial services industry is in charge of consumer finances, so it is important that it takes the lead in setting the highest ethical standards.