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 dreadful.”

The recent collapse of some of the biggest names in the financial services industry has borne witness to this thought. While part of the blame for the financial crisis was placed on lack of a strong regulatory framework, it was a largely a result of lowering of ethical standards by managements. This included performance evaluation and incentive structures that induced sale of high risk and inappropriate products without needing to prove sustainability, coupled with weak oversight, reporting and disclosures. The events also busted a common myth that that as long as you don’t violate the law, you are ethical.

The cost of ethical breakdown is usually more than just regulatory fines and litigation. It leads to loss of image and reputation, heightened scrutiny by internal functions and government agencies and even employee demoralization and attrition. On the other hand companies that have consciously invested in developing a strong ethics program have actually seen benefits by attracting similar minded employees and business partners. Sales in this industry are directly linked to trust – so stronger the image of the company, higher the sales in the long term.

The dictionary meaning of Ethics is “The rules or standards governing the conduct of a person or the members of a profession”. Ethics in financial planning can mean various things, many of which are not precisely stipulated by the law – like acting in the best interests of the client by providing objective and honest advice, providing full disclosures of risks and benefits, and transparency, fairness and professionalism in all business dealings be it product design or customer service.

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

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

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

Embed transparency and fairness into product design, sales literature, advertising and all customer communication

Reward and Recognition: Ensure incentive structure rewards the behaviours that you want to encourage and include values and ethics component in performance appraisals.

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

Whistleblower Protection: Create easily accessible channels for employees to escalate issues and have a robust process to investigate and deal with such complaints. Protect confidentiality to the extent possible and ensure non retaliation against whistleblowers. For employees to have faith in the process it is equally important to take swift and concrete action against offenders. This also displays how serious the company is about integrity.

The financial services sector is entrusted with consumers finances and therefore it is important that it takes the lead in setting the highest ethical standards.

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