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Gene Agnis
4605 S. Priest Drive #92
Tempe, AZ 85282
gene_agnis89@yahoo.com
September 23, 2014
The collapse of Enron and WorldCom brought ethical concerns and issues to the forefront of the
public. Their downfall caused thousands of Enron and WorldCom employees to lose all of their savings
including retirement. It also provided a wake-up call to investors across the country that held their entire
retirement savings in a single stock instead of diversifying their investments. The failure to educate those
employees about the importance of diversification was perhaps more than mere corporate or fiduciary
oversight. These two headline-grabbing collapses are just examples of how our modern maze (means
every financial planner faces an ethical dilemma when trying to do the right thing for a client) of business
models, methods of practice and investment strategies have substantially blurred traditional ethical
boundaries. Even completely honest financial planners can now face real dilemmas when trying to do the
right thing for their clients.
A generation ago, both the tax code and the financial products and services available were simpler
than they are today. For example, if someone wanted to buy stock, a stockbroker would place the trade. If
someone needed permanent life coverage, a whole life policy was issued. But now, planners must decide
if this traditional approach is better, or whether the client would be better off buying any number of the
diverse modern products available. This leads to purchase of unnecessary insurance coverages to boost
commission.
In light of these dilemmas, the Certified Financial Planner Board of Standards has issued a
substantial revision and upgrade of the ethical requirements that it expects from its certificants, such as
“putting the client's interests ahead of the C.F.P. certificants interests at all times and in all situations.
This is conceptually a step up from the previous standard of "reasonable and prudent professional
judgment" that was formerly in the code. The change essentially raises the code of conduct for any issue
or situation that is not considered to be within the bounds of financial planning services, per se, to a level
just below that of a fiduciary. All financial planning services;

Must be accorded the care of a true fiduciary, as opposed to merely acting in the client's
best interest.

This also constitutes a major step up in terms of responsibility, as fiduciaries have a strict
set of rules and guidelines that must be followed at all times.

For clients, this means that their planners are held to a higher legal standard of care than
before.” (CFP Board of Standards).
Regardless of what legal or moral standard they are held to, one of the biggest ethical dilemmas
planners face is choosing a method of compensation. The methods of compensation for both sales-driven
practitioners and planners are often interchangeable, since each can charge either fees or commissions
for their services. However, this flexibility can often present a moral dilemma for planners who must
choose one method of compensation over the other. A fee-based planner is one who charges clients
based on a percentage of their assets will increase his or her compensation simply by making the client's
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assets grow. If the planner charges the client a fee of 2% of assets, then the annual fee collected from a
$300,000 portfolio will be $6,000. Therefore, if the planner is able to make the portfolio grow to
$350,000, his or her compensation will increase accordingly. This type of compensation could motivate
the planner to employ more aggressive investment strategies than a traditional commission-based
broker.
In this sense, each type of compensation presents its own set of ethical issues. Ultimately, planners
will have to be willing to subordinate their own benefit to that of their clients, regardless of what
business model is used. Take for example a planner that can work on commission basis, a commissionbased planner is compensated for each transaction, regardless of portfolio gains or losses. These brokers
face the temptation to generate transactions as a means of revenue, even if they manage to avoid the
technical definition of "churning." Churning is “the practice of executing trades for an investment account
by a salesman or broker in order to generate commission from the account. It is a breach of securities law
in many jurisdictions, and it is generally actionable by the account holder for the return of the
commissions paid, and any losses occasioned by the broker's choice of stocks. Courts generally look at the
turnover of an investment account, or the number of times the investment capital has been re-invested
during a year. For example, for an actively traded mutual fund, the entire assets of the fund will be
involved in buying and selling transactions once every six to twenty-four months. In churning cases, the
entire assets of the investor are often traded once a month, or even more frequently. As a commission is
paid on each trade, commissions can substantially destroy the value of an investment account in a very
short period of time. Critics of the practice of paying brokers commissions for managing investment
accounts point to churning as one of the indicators that the brokerage system indirectly encourages such
behavior by brokers to the detriment of investors. Accounts invested in securities with steady returns
and little price fluctuation generate no commissions, and brokers are therefore not encouraged to invest
their client's money in such investments.” (Wikipedia.com)
Despite the onslaught of legislation and regulations aimed at curbing unethical practices (such as
the Sarbanes Oxley Act of 2002), financial planning in today's world depends more than ever upon
understanding a client's individual situation and objectives, and being willing to do the right thing for
them. The correct application of ethics in modern financial planning essentially boils down to having the
client understand exactly what they are doing and why, with full knowledge of the costs and risks
involved. An ethical transaction occurs when a client truly understands the ramifications of the advisor's
recommendations and is willing to go forward, assuming that all pertinent laws and regulations are being
obeyed. After all is said and done, ethics can simply be viewed as simply knowing the right thing to do,
and then doing it.
What are the Basic Fundamentals OF Ethics
Benefits of
Ethics
Weaknesses of
Ethics
Simply knowing the right thing to do, and then doing it.
The fact is that there is no central ethical resource that is available for all types of financial
planners. Commission-based brokers can consult their supervisors or compliance departments on certain
matters, but they are more than likely to get "corporate" answers to many of their questions - answers
that may allow the planner to create a profitable transaction without incurring liability, but may not
address what is truly best for the client. CFP practitioners may consult the CFP Board with ethical
questions, and other accredited planners may have ethical codes of conduct to refer to as well. But noncredentialed planners are essentially on their own for all practical purposes, as the rules imposed by the
regulatory agencies are not designed to address many day-to-day issues that planners face in their jobs.
As a planner, it is obvious to get your client to diversify their holdings with a sensible asset
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allocation, or perhaps to at least consider an alternate of some sort such as an immediate annuity option.
But how far should a planner go to encourage them to do this? Is it ok to use aggressive, fear-based sales
tactics, or even bend the truth a little, in order to help the client? After all, it clearly is in their best interest
to take the advice. If no action is taken, the planner could be held legally liable for failure to provide
adequate advice. In this case, the definition of "fear-based" sales tactics is also somewhat subjective; if the
planner shows the client a graphic illustration revealing how they will be bankrupt in less than 10 years,
is it using fear as a tactic, or is it merely a revelation of reality? The argument can be made that it is
controversially both at once.
Luckily, planners do have procedures to help in these types of situations. If a client refuses to take
the planners advice, they can present the client with a written disclaimer that states the client or
prospect is refusing to follow the recommendations presented by the planner. Unfortunately the best
solution would be to further inform clients of their options and choices. The best way I can see this
implemented is for the CFP and Sarbanes Oxley act to instill the mandatory class for clients on
investments. This would allow clients to make a more informative decision. If clients were to make more
informative decisions then there would be less crossroads in which the planner would have to face an
ethical debacle. Clients would know how high risk investments would be and take that risk informed. The
underlying assumption is that people enlist all of their knowledge when making financial decisions, so
the best way to improve decision-making is to provide more information. Another key pillar of financial
consumer protection is improved transparency and disclosure of financial product terms. If clients know
the terminology then they would be able to understand where as some make uninformed decisions due
to lack of terminology and the anxiety and embarrassment it would cost the client to ask the planner.
Factors that influence decision-making include the use of plain versus legal language, how financial
figures are displayed (e.g. APR versus Total Cost of Credit), and who presents the information to the
client. Policies that require institutions to share financial product information using transparent and
“smart” disclosure formats will likely help consumers make better decisions. These examples and others
are only the beginning of the path to better policy, and as solutions emerge they are unlikely to be
standard templates that apply equally to all consumers of all financial products in all countries.
Designing, implementing and evaluating effective behaviorally informed policy will require close
partnerships between policy-makers, empirical researchers and implementers who are sensitive to
context. These are simple steps in which if they were taken the ethical issues of Financial Planners also
known as Financial Advisors would steadily decrease and be very minimal. It would create fewer
situations in which the planner would not have to slightly misinform the client. Also a more informed
client would be able to notice and or know whether they do want to do more transactions with their
financials even though it may delete the value of their initial investment. As this paper states a class to
inform clients and legal and technical jargon broken down to common language for clients can better the
ethical crossroads and lessen the amount of times that ethical issues arise in regards to planners and
their clients.