Ethics and the professional adviser

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. This article, proudly sponsored by GSFM Pty Ltd, explores the important link between ethics and professionalism and how that relates to the financial advice practice.

Consumers and businesses rightfully expect the best of their professional service providers and professionalism is an indispensable component of ethics in business. It encompasses a set of behaviours, attitudes, and qualities that demonstrate a commitment to high standards, integrity and respect in the workplace.

Ethics and professionalism

In the financial planning industry, where trust and reputation are vital, professionalism plays a pivotal role in establishing and maintaining ethical advice practices. There are several aspects of professionalism that reinforce this.

First and foremost, professionalism fosters trust and credibility. When financial advisers (and others in the practice) conduct themselves professionally, they inspire confidence in their clients, colleagues and other stakeholders. Ethical business practices are built on trust, and professionalism acts as the foundation for establishing and nurturing this trust. By consistently demonstrating professionalism, financial advice businesses create an environment that encourages ethical behaviour.

Professionalism also promotes transparency and accountability. In an ethical business, open communication and accountability are essential; both are also crucial ingredients for a successful financial advice business. Professionalism encourages individuals to take responsibility for their actions, admit mistakes and work towards rectifying them.

When employees and leaders uphold high professional standards, they are more likely to adhere to ethical guidelines and act in the best interests of clients. This accountability fosters an ethical culture, where unethical behaviour is discouraged and quickly corrected.

Importantly, professionalism encourages personal and professional development, a key part of the plan to increase professionalism in the financial planning industry. Ethical behaviour involves continuous learning, growth, and improvement.

Professionalism promotes the pursuit of knowledge, the development of skills, and the cultivation of ethical decision-making abilities. It encourages individuals to stay updated on industry best practices, to engage in ethical dilemmas, and to seek guidance and mentorship when faced with challenging situations. An investment in professional development helps businesses to empower employees to make ethical choices and contribute to the overall ethical culture of the business.

Another critical aspect of professionalism is its impact on reputation and long-term success – both of your advice practice and that of the industry. For too long, media stories telling tales of unethical and often illegal practices have tarnished the industry.

A business with a strong ethical reputation gains a competitive advantage, attracts loyal clients who are more likely to refer business, and fosters strong relationships with suppliers, partners, and other stakeholders. Professionalism is closely tied to a company’s image and brand, and a reputation built on ethical practices can withstand challenges and crises. Conversely, unethical behaviour erodes trust, damages reputation, and can have severe consequences for an advice practice’s long-term viability.

The final but not least important point is that professionalism sets the tone for ethical leadership. Leaders who demonstrate professionalism serve as role models for their teams and their actions and behaviour influence the ethical climate within the business.

Ethical leaders understand the importance of integrity, accountability and fairness, and they actively promote these values within their teams. By fostering a culture of professionalism, leaders create an environment where ethical behaviour is the norm, enabling employees to align their actions with the practice’s ethical principles.

The professional advice practice in action

The following strategies are some that can be implemented in your advice 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 the Financial Planners and Advisers Code of Ethics 2019.

1. Establish a practice-wide code of conduct, one which encapsulates your business vision and values, as well as the Code of Ethics. The code of conduct should set clear expectations about employees’ behaviour when carrying out their duties. This code should also address topics such as confidentiality, client privacy, conflicts of interest, transparent practices, and compliance with laws and regulations.

Reinforce the importance of transparency and accountability and explain how these attributes contribute to ethical business practices. You need to be sure your entire staff understands each of the twelve standards in the Code of Ethics and how each standard may specifically intersect their role.

2. Lead by example, because employees will look to the key individuals in the practice to understand what behaviour is and isn’t acceptable. By consistently demonstrating professionalism, senior advisers and personnel will set the tone for ethics in the practice. Accordingly, they need to demonstrate the code of conduct in all they say and do.
3. 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 a demonstration of professional behaviour.
4. 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. Employees who take personal responsibility are more likely to work in the best interests of clients and abide by your firm’s code of conduct.
5. Professional development is integral to maintaining professionalism and workplace training is a positive way to ensure all staff understand both the practice’s values and the obligations that arise from the Code of Ethics. Encourage employees to engage in ongoing education and professional development to stay updated with industry best practices and regulations.

The use of workshops to promote ethics in your business can reinforce the both the practice’s standards of conduct and clarify behaviours and practices that do and don’t work within your code of conduct and the Code of Ethics.

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^[1] is a good source of cases and decisions made by AFCA and its predecessor organisations to form the basis of discussion.

6. 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.
7. Create a feedback loop within your practice. Encourage staff to provide honest feedback about the processes, conversations and client interactions to ensure the business leaders are aware of any issues, particularly those that contravene one of the standards in the Code of Ethics, that could potentially compromise the practice.
8. Encourage all team members to actively participate in industry associations, conferences and professional networking events. Such involvement promotes learning, knowledge sharing and the exchange of ideas among peers, which will further enhance professionalism.

These measures can help foster a culture of ethics and professionalism within the business, reinforcing the trust and confidence clients place in your organisation. By upholding and reinforcing professional standards in your business, you and your team can create a framework that supports and reinforces ethical behaviour. This in turn can lead to long-term success, client satisfaction and the development of a sound reputation. That’s a good outcome for both your business and the industry.

The Financial Planners and Advisers Code of Ethics

The Code of Ethics is a set of core values and standards that have laid the foundation for advice to be seen as a ‘true profession’. This Code was introduced with the intent to shape every aspect of financial advisers’ professional conduct.

There are five values (figure one) that underpin the Code and inform the standards that comprise it. Financial advisers are required to act in a way that demonstrates, realises and promotes each of these values.

According to the notes that accompany the legislation, these values are paramount, and all the other provisions of this Code of Ethics must be read and applied in a way that promotes the values. Each of the five values relate to specific ethical standards (figure two) that must be applied to all interactions with every client.

Client best interests at the core

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.

Case Studies

The following case studies are based on real complaints submitted to AFCA or dealt with by ASIC; 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 potentially breached, or upheld, standards within the Code of Ethics.

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

Jenny, aged 58, was a growth investor with an ongoing advice relationship with ACME Financial Advice that had spanned 10 years, from 2010 until 2020. Jenny was an informed investor, held a senior corporate role and paid the highest marginal tax rate.

In 2019, Jenny received advice from her adviser, Susan, that she should increase her exposure to Australian equities and decrease her exposure to global equities. Jenny subsequently claimed the advice was not in her best interests, given her proximity to retirement, and contrary to ACME Financial Advice’s stated target asset allocation for her age and risk profile.

As a result of the greater weighting to Australian equities, Jenny claimed her portfolio underperformed by 16.5% – or $48,990 in dollar terms.

While ACME Financial Advice acknowledged the allocation was contrary to its target allocation, it also stated that the advice was in Jenny’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 that accompanied the 2019 advice.

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

As a result, AFCA found in favour of Susan and ACME Financial Advice and neither party was required to compensate 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 Susan had done the right thing. As such, the case study shows she complied with the following standards of the Code of Ethics:

Case study two: Service for the fees charged?

A former ABC Financial Planning adviser, Michael, is now in a court enforceable undertaking with ASIC after he failed to maintain adequate records to demonstrate clients had received the services they had paid for.

An ASIC investigation found Michael did not keep adequate and timely records to show he had provided clients with services they were entitled to under ongoing service arrangements. The misconduct has resulted in ABC Financial Planning undertaking a remediation program for Michael’s clients; so far, more than $500,000 has been paid back to clients whose records were not sufficient to ensure they’d received the services owing to them.

The terms of the enforceable undertaking mean Michael cannot carry on a financial services business, provide any financial services, or act in any managerial capacity within a financial service, legal or accounting business. He must also notify all his clients of the remediation program and their right to complain to the Australian Financial Complaints Authority if any issues cannot be resolved with ABC Financial Planning.

The case study suggests that Michael potentially failed to comply with the following standards of the Code of Ethics: 

Case study three: Dishonest conduct

ASIC recently issued a permanent ban for financial adviser Lucas. The regulator found that for a one month period in 2020, Lucas had made 48 unauthorised transactions on the trading accounts of his clients using an online trading platform.

During the same period, Lucas also lodged five hard copy investment instruction documents with the trading platform. These contained forged signatures and purported to relay instructions to deal with financial products on behalf of his clients.

The permanent banning follows Lucas’s conviction earlier this year for engaging in dishonest conduct and providing financial services without appropriate authorisation. He was sentenced to a total of 18 months’ imprisonment but released immediately after entering into a recognisance release order in the amount of $5,000 requiring him to be of good behaviour for 18 months. He was also fined a total of $10,000.

Lucas is permanently prevented from:

• providing any financial services or engaging in any credit activities
• controlling an entity that carries on a financial services business or another person who engages in credit activities
• performing any function involved in the carrying on of a financial services business or in the engaging in of credit activities.

The action taken by Lucas were illegal, unprofessional and potentially breached the following standards of the Code of Ethics:

Case study four: Appropriate advice and recommendations

The complainants, Wendy and Phillip, brought a complaint about advice received from Jon, an authorised representative of the financial firm ABC Financial Advisers. They had moved from another financial advisory practice and wanted to maintain elements of the advice they’d previously received, in particular in respect to their Australian equities portfolio.

However, the complainants claimed the risk profile in a Statement of Advice dated in June 2019 (the June 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 March 2020.

Wendy and Phillip claimed ABC Financial Advisers had an obligation to act in their best interests and should not have taken action to implement the investment strategy set out in the June 2019 SOA during a period of market volatility. The complainants claimed that the timing of their entry into the market caused them a $28,780 loss on the first investment day.

ABC Financial Advisers said that it does not time the markets and always takes a medium to long term investment position. It also pointed out that Wendy and Phillip had specifically required the asset allocation used by Jon and that this particular investment strategy had been agreed to and approved by the couple.

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

AFCA also found there was no obligation for Jon or ABC Financial Advisers to “time the market” and there should be no reasonable expectation they would, particularly given the clear instructions provided by the complainants. As such, AFCA’s determination was in favour of Jon and ABC Financial Advisers and no compensation was required to be paid to the complainants.

This case study demonstrates that Jon provided appropriate advice and recommendations to Wendy and Phillip, taking into account their wishes in respect to their asset allocation.  As such, according to the case study, Jon is likely to have complied with the following standards of the Code of Ethics:

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 of the standards in the Code of Ethics? Does it breach your moral code? If it’s still unclear, discuss with your colleagues and licensee.

Professionalism is a fundamental pillar of ethics in business. It establishes trust, promotes transparency and accountability, cultivates fairness and equality, encourages personal and professional development, enhances reputation, and sets the stage for ethical leadership. By upholding high professional standards, businesses create a framework that supports and reinforces ethical behaviour and leads to long-term success. It’s important to remember that at its most simple, ethics can be viewed as knowing the right thing to do – and doing it.

 

 

———-

Notes:
[1] https://www.afca.org.au/what-to-expect/search-published-decisions/