The important role of business culture in an ethical financial advice practice

Financial advisers play a crucial role in helping Australians achieve their financial goals. However, the trustworthiness and credibility of financial advisers have been eroded in recent years due to various scandals and unethical practices in the industry by a small number of practitioners. As a result, creating and maintaining a positive and ethical business culture in an advice practice is of utmost importance to build and retain trust with clients.

The financial adviser Code of Ethics (Code) has strong ties with the overarching legislation that regulates the provision of financial advice. ASIC expects Australian Financial Services licensees to take a number of reasonable steps to ensure that their authorised representatives comply with both the law and the standards that comprise the Code (figure one). For example, licensees must:

• ensure their authorised representatives were aware of the need for compliance with the Code from 1 January 2020 onwards and that this compliance is ongoing
• provide training and/or guidance to their authorised representatives about the types of conduct that is consistent/inconsistent with the code
• facilitate individual advisers’ ability to raise concerns with the AFS licensee about how the licensee’s systems and controls may be hindering their ability to comply with the code, and acting on those concerns where appropriate
• consider whether advisers are complying with the code as part of their regular, ongoing monitoring of adviser conduct
• make any necessary changes to systems and processes to ensure compliance with the Code of Ethics (and, of course, the Corporations Act that governs it).

ASIC may suspend or cancel an AFS licence if it is no longer satisfied that the licensee or the licensee’s representatives are of good fame or character. While it is intended that this monitoring role will be transferred to ASIC in due course, it remains the licensees’ responsibility in the near term.

The importance of trust

To build an ethical practice, trust is crucial. In fact, it’s a fundamental aspect of any professional relationship, particularly in financial services. Trust is essential for building long-term relationships with clients and delivering quality services that meet their needs for several reasons.

Firstly, trust is the foundation of any professional relationship. When clients seek out professional services, they are entrusting professionals with confidential and sensitive information. Clients want to feel confident that their information is safe and that you will act in their best interests at all times. Trust is critical to establish a strong foundation for a professional-client relationship.

Secondly, trust is also essential for building long-term relationships. When it comes to financial advice, clients typically work with professionals over an extended period. Clients need to feel that they can rely on their adviser to provide high-quality services and that they have their long term best interests in mind. Trust builds loyalty and encourages clients to return to the same adviser for future services.

Thirdly, trust is also crucial in managing difficult situations that may arise during the course of a professional relationship. In financial advice services, issues can arise that may cause tension or conflict between the professional and the client. For example, you may recommend an investment strategy that a client does not agree with, or you may advise against a course of action the client is set on. In such situations, trust is essential to being able to successfully resolve the issue. Clients need to feel that their adviser is acting in their best interests and that they can trust them to resolve any issues that may arise.

Finally, trust is critical for building a positive reputation in the professional services industry. Advisers who are known for their integrity and trustworthiness are more likely to attract new clients and retain existing ones. Word of mouth is a powerful marketing tool in any professional services arena, and clients are more likely to recommend professionals they trust. Accordingly, trust is not only essential for building individual relationships, but it also contributes to the success of the entire profession. A lack of trust – and unethical behaviours that erode trust – can reflect poorly on the profession as a whole, hence the inclusion of standard 12 in the Code of Ethics, which requires advisers to conduct themselves – and their business – in a way that reflects positively on the profession.

Building a positive – and ethical – business culture

Building a positive business culture is essential for the success of any organisation, in any industry. A positive business culture creates an environment where employees feel valued, respected, and motivated to do their best work. This, in turn, leads to increased productivity, better employee retention, and improved overall performance. In an environment where you need to ensure ethical practices are implanted across your business, a positive business culture will support your endeavours.

To build a positive business culture, there are several key elements that need to be in place. These include a strong sense of purpose and values, effective communication, recognition and rewards, and opportunities for the growth and development of your staff.

One of the most important elements of a positive business culture is a strong sense of purpose and values. Your business needs a clear mission and set of values that are communicated to your employees and are incorporated into the day-to-day operations of the organisation. Employees who understand the purpose and values of your company are more likely to feel connected to their work, motivated to contribute to the success your business and embrace ethical practices.

Effective communication is an essential component of a positive business culture. You need to ensure there is open and transparent communication between employees and management, as well as among employees themselves. When communication is clear and consistent, employees feel more informed and engaged in the work that they are doing. They also feel more comfortable speaking up and sharing their ideas and concerns with their colleagues and superiors. This is particularly important in relation to ethics – employees need to be comfortable asking questions, questioning decisions or recommendations or seek support in dealing with an ethical conundrum.

Recognition and rewards are also important for building a positive business culture. Employees who feel recognised and appreciated for their contributions are more likely to feel motivated and engaged in their work. To support an ethical culture, employees should be recognised

Finally, opportunities for growth and development are crucial for building a positive business culture. This means providing your team with opportunities to learn new skills, take on new responsibilities, and advance within the organisation.

An ethics centric practice

It’s important to note that the approach to an ethics centred advice practice should not start and stop with the adviser. In fact, it extends from the receptionist who may greet clients and handle their paperwork, through to the adviser who meets with clients and develops an appropriate financial planning strategy.

It also includes others, such as paraplanners who implement investment decisions, or practice managers who develop staff training. All staff members need to understand how the Code of Ethics impacts their role in the practice and how they can perform their roles in such a way to meet their obligations and support the advisers and licensees to meet theirs. After all, it’s the licensee and adviser who carry the responsibility (and potential enforcement action) of a breach.

There are a number of strategies that can be implemented to create an ethics-centric practice that can help mitigate the risk of breaching the Code of Ethics.

1. Define and communicate your company’s mission and values: This should be a clear and concise statement that outlines the purpose of your business and the values that guide its operations. This is a great opportunity to enshrine business ethics and ethical practice into your mission and values.

Values could include ‘Always put the client’s best interests first’ or ‘We help our clients attain their financial and life objectives by always putting their interests front and centre.’

2. Code of conduct: by establishing a practice-wide code of conduct, one which encapsulates your business’s values as well as the Code of Ethics, your team should have a clear understanding of their role and the expectations that go with it. Any code of conduct should set clear expectations about employee behaviour when performing their role and, in an ethics-centric practice, how each of the twelve standards may specifically intersect their role.
3. Checklist: a checklist can be used to safeguard compliance with the Code. The questions in the checklist should be tailored to each role in the practice and include those relevant to dealing with prospective clients, as well as new and existing clients.
4. Client communication: It’s really important to communicate clearly, openly and honestly with your clients. In the initial meetings, don’t simply tell them what you will do for them, but detail how you will work with them to achieve their objectives. Establish ongoing channels of communication and explain how you will communicate with them. It’s important to detail the method and frequency.

Remember that it’s important not to make promises you know you cannot (or may not be able to) keep. As well as potentially being a breach of the Code of Ethics, it will reflect badly on the practice.

5. Foster open and transparent intra-practice communication: This can be achieved through regular team meetings, one-on-one check-ins with employees, and other communication tools. Encourage team members to discuss issues that could potentially breach of the ethical standards in the Code.
6. Set key performance indicators (KPI): by reinforcing your company’s 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 may sometimes be more challenging to quantify than one with specific and measurable outcomes, it will highlight the importance of values and ethics to your practice.
7. Workplace training: it is essential to make sure all staff understand both the practice’s values and the obligations of the Code of Ethics. Using workshops to promote ethics in your workplace will reinforce the practice’s standards of conduct and clarify behaviours and practices that do and don’t work within your own code of conduct – and within the Code of Ethics.

Importantly, ethics training should not be a once off. Ideally, training should be practical as far as possible, and teach team members to make good decisions that are compliant with the law and consistent with your practice’s values.

Ethics training could be incorporated as part of a regular team meeting; for example, by using case studies that address common ethical dilemmas across the financial planning industry. Cases could be drawn from the AFCA data base and discussed – how would your practice have dealt with situation that arise? You can also encourage your team to discuss issues arising with their clients, your organisation’s processes or technology that might lead to a breach of the Code of Ethics.

8. Feedback loop: by encouraging staff to provide honest feedback about the processes, conversations and client interactions, you are better placed to make sure you’re aware of issues that may arise that could potentially compromise your business. A feedback loop can help you identify gaps in relation to processes and procedures, and where a checklist or workplace training may ensure your business is not exposed.
9. Lead by example: regardless of your position in a practice, it’s important to set a good example. For those who are senior in the practice, it’s more important to demonstrate those behaviours that are and are not acceptable. Senior advisers and personnel will set the tone for ethics in the practice; as such, they need to demonstrate the Code of Ethics in all they say and do.
10. Hire the right people: When hiring new employees, it is important to consider whether they share the same values as your business. Consider including some ethics-based questions into your interview program; this could include client scenarios to see what actions your prospective employee would take.

This will help to ensure that everyone in your practice is working towards the same goals, that there is a strong sense of cohesion within the team and that your clients are prioritised.

11. Regular audit: These or similar strategies may have already been implemented in your practice. If so, it’s important to review the effectiveness of each. What’s working well and what’s not? If you can identify gaps in processes that may lead to a breach of the Code, it’s better to identify them ahead of time than when ASIC comes knocking on your door.
12. Encourage work-life balance: Employees who feel that they have a good work-life balance are more likely to be happy and productive in their work. A happy team member is more likely to be aligned with your values and work hard to support your business and its most important asset – your clients.

Building an ethical and positive business culture won’t happen overnight. It takes time, effort and a commitment from everyone in your business. However, the benefits of a positive culture are clear, and it will stand your practice in good stead to build a successful, ethical and client centric business.

Case studies

The following case studies are based on real events; however, the names of people and organisations have been changed, and some details altered. The case studies have been drawn from the Australian Financial Complaints Authority (AFCA) or its predecessor organisation. For each, potential breaches of the Code of Ethics are identified.

These case studies are representative of those that could be used as part of workplace training. An example of what the adviser did or did not do, why the client complained (or ASIC investigated) and the outcome. How would your team members have dealt with the situation? What would they do if they saw a colleague conducting themselves in a similar way? What are your business’s procedures in such an event?

Case study one

Alex and Monica obtained advice from Nigel, an authorised representative of the financial firm ABC Financial Planning. This advice recommended an investment of $125,000 into a single managed investment scheme. This was the sole investment recommended by Nigel. The scheme entered into liquidation three years later and was wound up with no return to investors.

Alex and Monica made a complaint to AFCA that the advice to make this investment was inappropriate as it did not match their risk profile (balanced) and there was no diversification in the overall strategy provided by Nigel.

ABC Financial Planning claimed the advice was appropriate given the information available to Nigel at the time.

Key findings:

• the overall strategy was heavily overweight towards a single managed investment scheme and lacked critical diversification
• the managed investment scheme was not an appropriate investment to recommend to the complainants
• risk profiling found the complainants to be ‘balanced’ investors.
• while it may have been appropriate for a balanced, growth or high growth investor to have some exposure to the managed investment scheme, the complainants were heavily overweight to this one financial product with minimal basis for this being appropriate for their needs and objectives
• there were no discussions about other options for diversification.

The determination was made in favour of the complainants and, within 28 days of Alex and Monica accepting this determination, ABC Financial Planning was to pay the complainants $127,522 plus interest.

Nigel potentially breached the following standards of the Code of Ethics.

Case study two

A Queensland based adviser recently pleaded guilty to two counts of engaging in dishonest conduct in relation to financial products or services, contrary to s 1041G of the Corporations Act. A further two offences of carrying on a financial services business without a licence will also be considered by the Court. This matter is being prosecuted by the Commonwealth Director of Public Prosecutions following an investigation and referral by ASIC.

The adviser was CEO and sole director of an unlicensed financial advice business and obtained nearly one million dollars from four investors and failed to invest those funds according to their instructions. The adviser represented to those investors that the proposed investments were “not as high risk” or were “capital guaranteed”, and falsely represented that he had invested the funds and that the investments were earning returns. For at least a year following each investment, he continued to tell the investors that their funds would be repaid with significant returns.

Further, the adviser provided fabricated statements of account, which purported to show that their investments had grown significantly since investing, even though the adviser had used the money for other purposes.

The adviser falsely represented to two clients that they would be investing in commodities such as oil, coffee, corn and gold. One investor provided $449,000 to invest in the transacting of gold sourced from Africa and was promised he would receive $300,000 every quarter for 12 months and that his funds were capital guaranteed. Instead, the adviser received those funds into an overdrawn account and spent the funds for his own purposes or to pay back other investors. The investor never received any returns and lost the capital invested.

Another investor was promised a net return of 30 percent of his capital plus original capital to be guaranteed and returned within three months. That investor lost all capital invested and received no returns. Most of the money was used by the adviser to pay another client within days of receipt of the funds.

Even though this ‘adviser’ was unlicenced, he potentially breached a number of standards in the Code of Ethics.

Case study three

Helen made a complaint to AFCA about an investment of $150,000 she made in a managed investment fund. The financial advice business for which her adviser Miriam worked, ACME Financial Services, was identified as the Responsible Entity and the issuer of the units in this unlisted fund that invested in medical properties.

Helen claims that:

• She was approached by her adviser Miriam, a director of ACME Financial Services, to invest in the fund.
• Miriam promised Helen a guaranteed rate of return at 9% per annum and stated it was a low-risk product; given the low rates offered by term deposits at the time, it was positioned as a favourable alternative.
• Miriam failed to assess the suitability of this product for Helen before she invested in the fund.
• Helen requested a withdrawal of her entire investment and despite repeated withdrawal requests, none were processed, and no funds were paid to her.

Key findings:

• Miriam’s encouragement to invest in the fund was found to be misleading.
• The promise of guaranteed returns and security of the investment involved misleading and deceptive conduct.
• It was reasonable to expect that the complainant would not have invested, had she known about the risks associated with the fund.

In addition, it was found that Helen’s financial literacy was limited, and she did not understand the recommended investment, the fees charged, or the investment timeframe required. ACME Financial Services was found to have breached its obligations, which resulted in Helen suffering a loss. Accordingly, the determination was in her favour. Within 30 days of the complainant’s acceptance of this determination, ACME Financial Services had to repay her $150,000 investment, plus interest.

Miriam and ACME Financial Services potentially breached the following standards of the Code of Ethics.

Case study four

The complainant, Bill, who was a client of the financial firm ACME Advice from about April 2020 to March 2022, lodged a complaint because:

• he believed he received inappropriate financial advice that was not in his best interests about his superannuation and incapacity payment options from the Defence Force Retirement and Death Benefits Scheme (DFRDB)
• he did not receive ongoing advice that he paid for.

He wanted ACME Advice to refund initial and ongoing advice fees he paid. ACME Advice did not engage in the AFCA dispute resolution process and did not, despite requests for relevant information, provide any substantive information.

The findings in, and the outcome of, the recommendation deemed correct by AFCA, and the complainant accepted the recommendation. The financial firm did not respond to the recommendation.

The outcome was found to be fair because ACME Advice is not entitled to retain fees it received from the complainant for ongoing advice it did not provide. The complainant paid for ongoing advice for the period 23 May 2020 to 23 March 2022 totalling $4,213 and it was found that it was not fair and reasonable for the financial firm to charge a fee for services it did not provide.

However, it was found to be fair that ACME Advice should retain the initial advice fee as it provided appropriate advice, which was found to be in the complainant’s best interests.

AFCA’s determination was substantially in favour of the complainant, who accepted the recommendation, which was as follows:

• $4,213 to the complainant plus interest equivalent to the increase in the Australian consumer price index compounded and calculated monthly from 1 May 2020 to the date of payment.
• $1,000 to complainant as compensation for his non-financial loss. No interest is payable on this award.

ACME Advice did not respond to the recommendation and the complaint has proceeded to a determination under rule 12.3(b)(i) of the AFCA Rules.

Although the initial advice was found to be in Bill’s best interest and appropriate to his circumstances, there are areas where ACME Advice did not behave appropriately and risked breaching several standards in the code.

Creating and maintaining an ethical business culture in an advice practice is crucial to building and retaining trust with clients. Financial advisers should establish a code of ethics, implement compliance and risk management processes, foster a culture of transparency and accountability, invest in continuous professional development, provide personalised advice, encourage feedback from clients, emphasise ethical behaviour in performance metrics, and build a diverse and inclusive practice. By doing so you are best placed to meet your ethical obligations and build a strong book of satisfied clients.