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Most financial advisors consciously try to do the right thing always. However, most people are sometimes prone to error, which is only human. The reality is that advisors, through no fault of their own, sometimes find themselves in situations where conflicts between ethical principles, client interests, and regulatory requirements can create ethical dilemmas.
The challenge for advisors is that they have to overcome a huge trust deficit with clients and prospects. To earn and keep their trust, they must constantly be hyper-aware of their actions and how they may be perceived, whether an ethical breach is intentional or not. That requires having a conscious and deliberate strategy to resolve any potential conflict.
Here are the most common ethical dilemmas faced by financial advisors.
#1. Conflicts of interest
Any time an advisor acts based on personal or financial incentives, there is the potential for compromising their objectivity and the best interests of their clients. While conflicts of interest themselves may not be disqualifying, failure to disclose them fully is unethical.
That’s the dilemma fee-based advisors face when they charge fees for advice but also recommend investment or insurance products offered by third-party providers. Advisors who receive compensation from anyone other than the client must disclose the source and how they are compensated.
#2. Suitability and risk tolerance
Advisors who are not fiduciaries must ensure their recommendations align with their clients’ financial goals and risk tolerance. Ethical dilemmas may arise when advisors recommend products that may be suitable but not necessarily in their best interests.
For example, recommending a particular mutual fund may suit the client’s goals and risk profile, but if it has higher expenses than a similar fund, it’s not in the client’s best interests. Or, if a client requests a specific investment and an advisor offers it even though they know it’s not consistent with their risk profile, the advisor is not acting in the client’s best interests.
#3. Insider information
Financial advisors may come across non-public information that could potentially benefit their clients. However, using such information for personal or client gain is both unethical and illegal.
#4. Privacy and confidentiality
Financial advisors are entrusted with sensitive client information, and maintaining client confidentiality is crucial. Ethical dilemmas may arise when advisors are required to disclose client information to comply with legal or regulatory obligations or when sharing information within their firm.
Steps to take to avoid becoming ethically challenged
Advisors who find themselves in the middle of an ethical dilemma must resolve the conflict immediately. The most effective and ethical way to do that is with complete transparency—explaining what has happened to the client, resolving to address it, and reassuring the client it will never happen again.
Though your honesty could cost you a client or two, most will see you for what you are—an advisor with integrity who can be trusted.
To help you avoid becoming mired in ethical dilemmas, you can commit to incorporating certain best practices that will keep you out of trouble.
#1. Emphasize client-centricity
Make it a point always to prioritize the best interests of your clients and act in a fiduciary capacity whenever possible.
#2. Complete Disclosure and transparency
If you sense any of your advice or recommendations could present a conflict of interest, provide your client with clear disclosures as to how and why you’re recommending it so that they can make an informed decision. Transparent communication is the best way to build trust in an advisor-client relationship.
#3. Continual professional development
To navigate complex ethical dilemmas and maintain the highest levels of integrity and competence, it’s essential to stay updated with industry developments, regulatory changes, and ethical standards. Industry trade associations and certification programs offer valuable insights and training on best practices for meeting the highest ethical standards.
#4. Build a relationship with your compliance officer
Schedule regular meetings with your compliance officer to gain their perspective on policies and procedures that impact you. When you have a relationship with your compliance officer, you can seek their guidance in navigating any issues that may arise.
Ultimately, advisors with the best intentions must develop an acute awareness of how or whether their practices and procedures might be butting up against ethical lines. Advisors must constantly reconcile their actions with ethical principles and client interests and err on the side of caution to avoid crossing any lines.
Related: 5 Common Communication Challenges Financial Advisors Face Today