When a financial planner knowingly and willingly rips off a client, provides deliberately misleading advice or promotes an inappropriate product, the question is often, “Why?”.
It’s not enough to say only that the planner in question is a crook or a charlatan; there’s more to the issue than that. What is the reason that financial planners make both ethical and unethical decisions?
A new report released recently, Ethics and Financial Advice: The Final Frontier is an examination of “the current ethical issues in the Australian financial advisory sector and the factors that influence ethical decision making within Australian financial services organisations”.
The report, by Dr June Smith though Victoria University, sought to improve the general understanding of “the factors that influence ethical decision making within financial services organisations”.
And it concludes that that there are both individual and “contextual” factors at play. The contextual factors – that is, the environment in which a planner works – have been found to have the greater influence.
In other words, if a financial services organisation does not effectively instill a culture of thinking and behaving ethically, a financial planner is more likely to behave unethically.
Some of the “individual” factors that influence behaviour and decision making include “the ethical reasoning ability of the individual decision maker, which in turn is influenced by the decision maker’s age, experience and whether they hold a professional designation”.
However, “the contextual factors are numerous and seem to have more influence on ethical conduct outcomes than individual factors”, the report says.
“These contextual factors include remuneration structures, the role played by the individual decision maker, the ethical climate and culture of the organisation and the presence of ethical leadership.”
A clear outcome of this finding is that “improvement in individual conduct and competency standards whilst necessary, may not achieve [the] objectives” of ensuring that high-quality financial advice becomes the norm, and financial planning achieves recognition as a true profession.
“It is suggested that regulatory responses may not always resolve these issues and that a more comprehensive solution may be required,” the report says.
It recommends that ethical guidelines be incorporated into organisational structures in the same was as corporate governance, risk management and compliance “as an alternative or complementary mechanism to the reliance on constant regulatory reform going forward”.
Like so much that is blindingly obvious, in this day and age, we clearly need a report to confirm the theory of that which financial planners are unwilling to confront in practice – or confirm without a piece of paper signed by someone else.
There is good and bad in every industry and all the reports won’t change that. Financial planning emerged from a heritage and culture of selling what was good for the sales person and not what was necessarily good for the client, or customer.
Regulatory solutions are unlikely to provide us with a silver bullet. On the contrary it might stifle the financial planning industry. Until and unless financial planners put the clients’ well being first and commit themselves to high ethical standards extra regulation will only add another layer of red tape.
Source: Professional Planner Online. 19 January 2011
Posted on 05/02/2011 by David Pointon
