Ethics and Trust in the Investment Profession

Ethics Defined

Many professions define a code of ethics aimed at outlining cultural values within that profession. For the investment industry, ethics are defined as a standard of conduct valued by the financial sector. These can be expressed via concrete rules of behavior as defined by law, or through abstract concepts meant to define the spirit of organizational conduct. The Chartered Financial Analyst (CFA) Institute has outlined six components to its code of ethics. Members of the CFA Institute must:

1. Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets.

2. Place the integrity of the investment profession and the interests of clients above their own personal interests.

3. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities.

4. Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession.

5. Promote the integrity of, and uphold the rules governing, capital market.

6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

Reading 1 LOS 1a:

explain ethics


Describe the Role of a Code of Ethics in Defining a Profession

The role of ethics within the investment profession is to promote the integrity and viability of global capital markets for the ultimate benefit of society. By learning and committing to that a code of ethics, each professional contributes to a universal protocol of acceptable behavior. Within the financial sector, there are both Global Investment Practice Standards (GIPS), as well as CFA Institute Standards of Practice.

Reading 1 LOS 1b:

describe the role of a code of ethics in defining a profession


Ethical Dilemmas

An ethical dilemma occurs whenever there are two or more choices.  In this given circumstance there will always be a best choice, even when each option appears to have negative consequences.

Although the CFA Institute code of ethics aspires to drive behavior through high-level,moral principles, a dilemma can occur when two or more standards of conduct compete for primary preference. Major areas in which ethical dilemmas occur are (1) Misrepresentation, (2) Misconduct, (3) Fairness, (4) Loyalty prudence and care.  Each will be discussed within a future LOS.

Reading 1 LOS 1c:

identify challenges to ethical behavior


The Need for High Ethical Standards in the Investment Industry

In 2014 the investment industry accounted for more than $64 trillion in assets. Additionally, it is growing at eight percent a year. It can be theorized that with trillions in assets and billions of financial transactions each year, even a small percentage of unethical exchanges amount to a significant overall number.

A market collapse is devastating to faith and confidence in the investment industry. With each significant downfall, there is an increase in unemployment and a slump in the economy.  The well-being of capital markets depends largely on consumer trust. Trust is earned through ethical conduct.

Reading 1 LOS 1d:

describe the need for high ethical standards in the investment industry


The Difference Between Ethical and Legal Standards

Often people equate ethical behavior with legal choices.  However, there are numerous choices that may be legal but have no moral standing.  It is important to remember that all laws stem from a place in which moral covenant has broken down. The means by which control is maintained in these circumstances is to set laws and stipulate punishment. Therefore, the law is reactive.  By contrast, ethical conduct is proactive and the means by which standards of practice maintain a high level of morality beyond the legality.

One may adhere to the letter of the law, but ignore the spirit of the law. For example, IRS regulations repeatedly single out actions with “no legitimate business purpose”. If an investment professional makes choices with no legitimate business purpose in order to avoid short-term loss (i.e. taxation, fees) then you may be staying within parameters of what is legal, but with no purpose other than to get around the law.

Reading 1 LOS 1e:

distinguish between ethical and legal standards


Framework for Ethical Decision Making

A framework for ethical decision making is defined as a set of principles established to aid investment professionals in conducting business with integrity. The CFA Institute has outlined six tenets of ethical behavior as outlined in LOS 1a.

Beyond understanding the six ethical considerations established by CFA, one must apply these principles through ethical analysis. It is important to recognize that ethical dilemmas are a normal and predictable part of most jobs.  This realization will help increase the likelihood that you will notice and act on ethical issues before they become destructive.

Reading 1 LOS 1f:

describe and apply a framework for ethical decision-making



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