Ethics and the professional practice

19 Jul 2021

From AdviserVoice - This Ethics article is proudly brought to you by GSFM

Ethics can be viewed as knowing what the right thing to do is, and then doing it.

In financial planning, ethics can be distilled into acting in the client’s best interests at all times, acting with competence, honesty, integrity and fairness. In short, the way any one of us would like ourselves and our family members and friends to be treated by a professional service provider. This article, proudly sponsored by GSFM Pty Ltd, explores the important link between ethics and professionalism.

Quite reasonably, consumers (and businesses) expect the best of their professional service providers. They expect their medical practitioners to diagnose illness and dispense medicine or refer to specialists as appropriate, or their accountant to provide tax advice and complete tax returns with honesty and timeliness.

Likewise, consumers expect their financial adviser to act with their best interests front and centre. For the majority of advisers, that is exactly how they run their business – acting in clients’ best interests and with competence, honesty, integrity and fairness at all times. While the majority do the right thing, which is in the best interests of both their clients and their practice, a number of licensees and individuals have overlooked their obligations to clients. This has led to ‘best interests’ being enshrined in law, with ASIC charged to monitor and enforce this requirement. This includes FASEA’s Code of Ethics, with twelve standards also enforceable by law.

The Code of Ethics is a set of principles and core values that, according to FASEA, has laid the foundation for advice to be seen as a ‘true profession’. It believes that those financial advisers who formerly provided a commercial service, are now committed to offering a professional service, informed by a Code of Ethics intended to shape every aspect of their professional conduct.

Five values (figure one) underpin FASEA’s ethical standards (figure two). Financial advisers are required to act in a way that demonstrates, realises and promotes each of these values.

Importantly, these values require that advisers meet their obligations under law in respect to the advice provided to each client. This includes:

best interests’ duty
appropriateness of advice
prioritisation of client’s interests
additional requirements for product replacement recommendations
Australian Taxation laws.

Each of the five values relates to specific ethical standards that must be applied to all interactions with every client, as detailed below.

Unprofessional conduct

Australians consumers and small businesses lodged more than 70,000 complaints about banks, insurers, super funds, investment firms and financial advisers with the Australian Financial Complaints Authority (AFCA) in the past 12 months. Of those complaints, 2,293 were categorised in the top five received in respect to investment and advice, nearly 500 fewer complaints than the previous financial year (2,766). This downward trajectory is positive for the financial advice industry.

In cases where an AFCA investigation finds an adviser has breached their duty of care, they may be liable for compensation. In the last financial year, complainants secured more than $240 million in compensation and refunds after seeking AFCA’s help. In addition, AFCA’s investigations into a range of systemic issues resulted in remediation payments to consumers totalling nearly $32 million in the past financial year.

Compensation payments are not the only potential outcome of unprofessional and unethical practise. Advisers might be liable for prosecution by the regulator, the outcome of which may be a substantial fine, a jail term, loss of licence – or all three. It is particularly challenging to re-establish a financial advice practice once its reputation, and/or the reputation of its advisers, has been tarnished by a lack of professionalism and unethical behaviours.

Ethics and professionalism

“It is inherent in the definition of a profession that a code of ethics governs the activities of each profession. Such codes require behaviour and practice beyond the personal moral obligations of an individual.”^[1]

Over the years there has been a lot of debate about financial advice or financial planning being a “profession”. Under the most basic definition, a ‘professional’ is described as someone who follows an occupation as a means of earning a livelihood, generally based on specific knowledge and experience.

Professionals have generally undergone some tertiary study – think about medical professionals, lawyers or journalists. However, the term professional typically has a broader meaning focused around some moral or ethical foundation within the practice of a specific and usually established expertise^[2].

Consumers expect the best of their professional service providers. They expect services to be provided honestly and transparently, with integrity, and most importantly, consumers expect the professional to keep their best interests central to all that they do.

Professionals are usually required to abide by a set of professional standards for their industry; these standards are often managed by a governing body that represents the interests of that group of professionals. It usually comprises an overarching vision, a series of values, as well as a set of ethics that outlines the behaviours and practices the members of that body must adhere to.

According to research^[3] undertaken by the Financial Services Council earlier this year, trust remains an issue for consumers, with respondents expressing the expectation that advisers must demonstrate a level of professional competence and have no “vested interests”. This outcome reinforces that for financial advice to be viewed as a profession by the broader Australian community, ethical standards and practices must form the cornerstone of each and every advice business, large and small.

A study^[4] that investigated effects of codes of ethics on perceptions of ethical behaviour found the presence of such a code in businesses improved the organisational climate and supported ethical behaviour. It also backed the freedom to act ethically and a greater satisfaction with the outcome of ethical problems. Importantly, the presence of a code of ethics was found to have a positive impact on perceptions of ethical behaviour in organisations.

FASEA’s Code of Ethics requires financial advisers to not only abide by the law but aims to raise standards for financial advisers to improve consumer outcomes and increase public confidence in the advice they receive.

This Code of Ethics appropriately places personal responsibility on advisers to understand and apply their professional judgement to their ethical obligations in client engagements so that their professional conduct is focussed on providing advice that is in the best interests of their clients^[5].

The professional practice

The following strategies can be implemented in your practice to promote and reinforce professionalism. At the same time, these strategies can help to mitigate the risk of breaching any of the twelve standards in FASEA’s Code of Ethics.

Establish a practice-wide code of conduct, one which encapsulates your business’s vision and values, as well as FASEA’s Code of Ethics. Your code of conduct should set clear expectations about your employees’ behaviour when carrying out their duties. You need to be sure they understand each of the twelve standards in the Code of Ethics and how each standard may specifically intersect their role.
Lead by example, because employees will look to the key individuals in the practice to understand what behaviour is and isn’t acceptable. Senior advisers and personnel will set the tone for ethics in the practice; as such, they need to demonstrate the code of conduct in all they say and do.
Honour commitments you make to your clients and staff. By demonstrating the importance of keeping promises, your colleagues will see and experience the benefit. Whether it’s being on time for client or team meetings, being accountable for your work within the practice, or keeping promises to clients, it’s demonstrating professional behaviour.
Encourage all team members to take personal responsibility for their work and behaviour, both of which are critical to success in the workplace. Personal responsibility means being responsible for your own actions, words and, ultimately, work performance. Personally responsible employees work in the best interests of clients and are more likely to abide by your code of conduct.
Workplace training is a positive way to ensure all staff understand both the practice’s values and the obligations of the FASEA Code. The use of workshops to promote ethics in your workplace can reinforce the practice’s standards of conduct and clarify behaviours and practices that do and don’t work within your code of conduct.

Importantly, ethics training should not be ‘set and forget’. Ideally, training should occur regularly and teach team members to make good decisions that are compliant with the law and consistent with your practice’s values.

It could be incorporated as part of regular team meeting; for example, by using a variety of case studies that can address common ethical dilemmas across the financial planning industry. The AFCA website^[6]is a good source of cases and decisions made by AFCA and its predecessor organisations to form the basis of discussion.

Ethics should be a key performance indicator (KPI). By reinforcing and potentially rewarding all staff for embodying your values, adhering to your practice’s code of conduct and behaving in a way that makes ethical behaviour central to their work will create an ethical practice. Although a values-driven KPI can be harder to quantify than one with specific and measurable outcomes, it will highlight the importance of values and ethics to your practice.
Create a feedback loop within your practice. Encourage staff to provide honest feedback about the processes, conversations and client interactions to ensure no issues may arise that you are not aware of, but which could potentially compromise your business.

Case Studies

The following case studies are based on real complaints submitted to AFCA; however the names of people and organisations have been changed, and some details altered. For each case study, it will be shown where the adviser has upheld (or potentially breached) any of the standards within FASEA’s Code of Ethics.

Case study one: Acting in a client’s best interests

The complainant, Mary Tucker, was a growth investor with an ongoing advice relationship with ABC Financial Planning that spanned 12 years from 2008 until 2020. Mary was an informed investor and on the highest marginal tax rate.

In 2018, Mary received advice from her adviser, Jill, that she should decrease her exposure to international equities in favour of Australian equities. Mary subsequently claimed the advice was not in her best interests and contrary to the ABC Financial Planning’s own target asset allocation. As a result of the greater weighting to Australian equities, Mary claimed her portfolio underperformed by 14.3% – or $47,860 in dollar terms.

ABC Financial Planning acknowledged the allocation was contrary to its target allocation but said this was in Mary’s best interests because it provided access to tax benefits in the form of franked dividends. It also provided greater stability as it reduced foreign currency risk. The overweighting to Australian equities was clearly disclosed and explained in the Statement of Advice (SOA) that accompanied the 2018 advice.

AFCA investigation determined that the advice Mary received was in her best interest. Although it resulted in Mary having a greater exposure to Australian equities, AFCA was satisfied the rationale was clearly articulated and the reasons were not contrary to Mary’s best interests.

As a result, AFCA found in favour of Jill and ABC Financial Planning; neither party needs to pay compensation to the client.

Clients seeking financial advice expect the advice provided will leave them in a better position. Section 961G provides that the resulting advice must be appropriate to the client. In relation to this advice, AFCA found there was a sound basis for deviating from the firm’s target asset allocation.

This case study demonstrated that financial adviser Jill had done the right thing. As such, she most likely complied with the following standards of FASEA’s Code of Ethics:

Case study two: Failed the best interests test

The complainant Jack was an elderly long-term customer of ABC Bank and its related entities. Between 2008 and 2018, Jack received periodic assistance from several authorised representatives in the wealth management division of ABC Bank.

On recent review, Jack claimed the advice and product fees incurred over this 10 year time period were excessive. He also claimed the advice received was inappropriate for his conservative risk profile. ABC Bank says all advice provided was appropriate for the complainant’s circumstances at the time it was given, except for some investment advice provided in 2018.

The adviser at that time had recommended Jack invest in a structured product because of its projected income yield. He did not explain the risks associated with the investment or the projected yield, nor did he explain the complex fee structure. Jack subsequently sold his units in the structured product and incurred a loss. He received no income from the product.

AFCA found in favour of the complainant; the product recommendation was not in his best interests. As a result, ABC Bank had to pay Jack compensation in the amount of $25,500 plus compound interest calculated at a rate provided.

This case study revealed that ten years of good advice can be undone by one poor investment recommendation and demonstrated how quickly good reputations can be tarnished. The bank adviser in this case study had most likely failed to comply with the following standards of FASEA’s Code of Ethics:

Case study three: An insurance complaint

In 2017, Christopher received financial planning advice from Matthew, an authorised representative of ACME Advice & Insurance. The advice was in relation to the purchase of an income protection policy. The adviser recommended an ‘agreed value’ benefit of $6,250 per month; however, after reviewing the complainant’s income and medical information, the insurer offered just $1,954 per month on an agreed value (Policy 1). Christopher accepted the offer, but later allowed the policy to lapse.

Christopher then sought further advice from Matthew in April 2020, requiring a new income protection policy. This was placed on an ‘indemnity’ basis (Policy 2). Christopher claimed on Policy 2 the day after his application was accepted by the insurer. However, the benefit was lower than he expected, and he asserted that Matthew failed to provide adequate advice and service because:

He expected an agreed value benefit rather than indemnity
The application contained inconsistencies about his medical history.

The complainant sought compensation to top up his claim payments to equal $6,250 per month for the period for which he was unable to work.

ACME Advice & Insurance said the advice and service met relevant requirements. An agreed value policy was not available in 2020 and the complainant suffered no loss. AFCA believes that Matthew’s recommendation to acquire an indemnity-based policy was in Christopher’s best interests at the time. The evidence and paperwork suggests that the adviser sought to place the best cover available in response to a time critical request.

As such, there was insufficient evidence to suggest Matthew acted in a way that misled or deceived the complainant and caused him to incur a loss. AFCA’s determination was in favour of the financial firm and found there was no compensation payable to the complainant.

This case study demonstrates that Matthew sought to get the best outcome possible for his client. As such, according to the case study, Matthew is likely to have complied with the following standards of FASEA’s Code of Ethics:

Case study four: A client directed situation and complaint

The complainants, Craig and Sarah, brought a complaint about advice and financial services received from Benita, an authorised representative of the financial firm A&B Financial Advice. They had moved from another financial advisory practice and wanted to maintain elements of the advice they’d previously received, most notably as it applied to their Australian equities portfolio.

However, the complainants claimed the risk profile in a Statement of Advice (SOA) dated in August 2019 (the August 2019 SOA) was inappropriate for them and, as a result, the investment funds of their self-managed superannuation fund were invested across an inappropriate asset allocation in February 2020.

Craig and Sarah claimed A&B Financial Advice had an obligation to act in their best interests and should not have taken action to implement the investment strategy set out in the August 2019 SOA during the period of market volatility caused by the COVID-19 pandemic. The complainants claimed that the timing of their entry back into the market caused them a $30,000 loss on the first investment day.

A&B Financial Advice said that it does not time the markets and always takes a medium to long term investment position. It also pointed out that Craig and Sarah had specifically required the asset allocation used by Benita and that this particular investment strategy had been agreed to and approved.

AFCA found that Benita properly assessed the clients’ risk profiles, although they were then specifically altered by the complainants to maintain a pre-existing investment portfolio asset allocation. AFCA also found that the asset allocation for both portfolios was within the variation tolerance for each of the complainants’ adjusted risk profile.

Finally, AFCA found there was no obligation for Benita or A&B Financial Advice to “time the market” and no reasonable expectation they would, given the clear instructions provided by the complainants. As such, AFCA’s determination was in favour of A&B Financial Advice and no compensation was required.

This case study demonstrates that Benita provided appropriate advice and recommendations to Craig and Sarah, taking into account the complainants’ wishes in respect to their asset allocation. As such, according to the case study, Benita is likely to have complied with the following standards of FASEA’s Code of Ethics:

Financial advisers are required to act ethically and in the best interests of their clients at all times.

The best interest duty reinforces both the operations and provision of advice by financial planning practices and enshrines it in law. The principle guiding the application of the best interests’ obligation is that meeting the objectives, financial situation and needs of the client must be the paramount consideration when providing advice. This also underpins the professionalism of the industry.

Section 961B of the Corporations Act 2001 (Cth) outlines the following steps a financial adviser should follow to comply with the best interests’ duty:

identify the objectives, financial situation and needs of the client
identify the subject matter of the advice and the objectives, financial situation and needs of the client
make reasonable inquiries to obtain complete and accurate information
assess whether you have the expertise, if not decline the advice
if reasonable to consider recommending a financial product then conduct a reasonable investigation and assess the information gathered
base all judgements on the client’s relevant circumstances
take any other steps, at the time the advice is provided, that would reasonably be regarded as being in the best interests of the client

Clients seeking financial advice expect the advice provided will leave them in a better position. Section 961G provides that the resulting advice must be appropriate to the client.

An ethical and professional partnership between adviser and client occurs when a client understands the adviser’s recommendations and trusts that the advice is in their best interest. If unsure about any element of advice you provide, if it’s not clearly black or white, consider the client outcome. Will you client be better off if that advice is implemented? Does the advice breach any FASEA standard? Does it breach your moral code? If it’s still unclear, discuss with your colleagues and licensee.

It’s important to remember that at its simplest, ethics can be viewed as knowing what the right thing to do is, and then doing it.