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Ethical Issues In Financial Management

You are a broker at an investment advisory firm. You and your client disagree on investment decisions he wishes you to make on his behalf You feel that these investments fall outside of the client's investment objective and risk tolerance. The client is adamant and informs you that if you don't place the orders, he will find someone else in the firm who will do so. Should you comply with your client's wishes or fire him? Provide a detailed justification for your decision.

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Client Demands, Self Interest and Risk Tolerance

Here are the variables:

Your perception and experience
Client's perception and experience
The interests of the firm you work for
Method by which you get paid (fee versus commission)
Client's present condition and economic history
Nature of markets under similar conditions
Any insider information from the advisor or the client
The client's "best interest"
The definition of "fiduciary"
Previous agreements, that is, the goal and parameters of investment choices relative to the client

Under the normal fee only plan, eliminating the client might not make any economic sense for you, the advisor. If the client is paying you a flat fee, then his economic condition is no direct concern of yours, especially when the client is "adamant" about investing in such a risky security. Using a system where you, the advisor or broker, gets a share in the profits is a different matter. This latter is a commission method, the other a fee method. One reason why the commission system is superior in many cases is that your interests coincide with the client's. This means you have more room to negotiate, unless the client is so unreasonable and ignorant that letting him go might not be a bad idea.

The Board of Standards dealing with Certified Financial Planners is an important document, partly because it addresses this question directly, partly because it is meant for the whole trading industry. Keep in mind that there are dozens of "codes" out there, but they normally refer to a singe institution. This one is distinct because it is meant to be of general application. There is no radical approaches here, but these seem to be more reminders of basic rules than a comprehensive ethical doctrine. Looking at the basic principles of the code might help make sense out of this issue:

First, integrity is the principle of moral wholeness, not a fragmented morality where one standard works for business, another at home. This is falsity, hypocrisy and contradictory. Merely giving into the client's irrational wish is not an integral concept. Integrity implies high standards, well integrated into one's whole life, not just at work. The only issue here is whether or not the client knows something you don't. If he does not, then this principle would suggest that you a) talk him out of it, or b) reject him as a client, regardless of your pay structure.

Second, objectivity is crucial when analyzing data and trends. In this case, assuming that the client has no inside information that might be driving his argument, the facts should speak for themselves.

Third, competence is the central issue here. This is not all that different from objectivity. This entire case rests upon the fact that the advisor knows more than the client. The former presumably knows far more about the market and potential risks than this client (again, assuming he has no other unspoken information).

Fourth, fairness is to be treated as you would want to be treated in an analogous situation. Here, it seems plain: I, personally, would want to be prevented from such an investment. That's the whole point of hiring an advisor in the first place.

Fifth, confidentiality works both ways. If the ...

Solution Summary

The expert examines the ethical issues in financial management for investment advisory firms.