In the next few minutes:
No calculations in this reading. It's about judgment.
Ethics is a set of shared beliefs about which behaviour is good or acceptable and which is bad or unacceptable.
Ethical conduct follows moral principles and is consistent with what society expects. A second description: conduct that improves outcomes for the people it affects.
The people directly or indirectly affected by your conduct are stakeholders. For an investment professional: clients, coworkers, the employer and the profession as a whole.
A choice can help you and hurt a stakeholder, for example taking credit for a colleague's research. Ethical conduct balances your self-interest with the impact on others.
A code of ethics is a written set of moral principles that guides behaviour by describing what is acceptable.
It communicates a group's values, principles and expectations. Some codes add standards of conduct: rules that set a minimum acceptable level of behaviour. A minimum is a floor. It isn't the same as "best practice".
A profession is an occupational group with specialised expert knowledge whose members serve others and agree to follow a code of ethics. Doctors and lawyers are the classic examples.
The code is how a profession tells the public: our members will use their skills to serve clients honestly. It can raise public trust. It can't guarantee every member complies.
Check yourself
Beyond specialised knowledge, a profession typically has:
Notice that most of these are things the profession does to itself, not things it asks of clients.
Investment professionals are entrusted with clients' wealth, and they must use their skills to both protect and grow it.
The product is also intangible. You can judge a laptop or a meal yourself. Judging the quality of investment advice is much harder, so clients have to rely on trust far more than in most businesses.
Unethical conduct hurts more than one client. It hurts the firm, which loses business, and it hurts society through the capital markets:
Even the perception of extra risk is enough to start this chain.
Check yourself
Clients rely on an investment professional's expertise, judgment and ethics, so most features of a profession apply here.
Ethics matters even more because clients often know little about securities, fee structures or the sources of bias in a recommendation. Today, some professionals are held to one standard and others to a stronger one. The next card compares them.
Suitability is the match between the client's return requirements and risk tolerance and the characteristics of the securities recommended. A fiduciary standard is stronger: use your knowledge to act in the client's best interests.
A recommendation passes if it matches the client's profile.
People tend to rate their own ethics as better than others' and to put too much weight on their personal traits ("I'm an honest person").
The curriculum's point: situational influences, the pressures outside you, often matter more than character in determining how ethically you behave. Good people in bad situations make bad decisions.
Common situational influences:
Each pulls attention towards self-interest and the near term, and away from the ethical quality of the decision.
A firm with strict rules-based compliance can build a culture where people ask only "What can I do?" (what the rules allow).
The better question is "What should I do?", based on ethical principles and longer-term results. A rulebook can't anticipate every situation.
Check yourself
Not every unethical act is illegal, and not every illegal act is unethical.
| Legal | Illegal | |
|---|---|---|
| Ethical | Most everyday conduct | Some whistle-blowing; civil disobedience |
| Unethical | Recommending a relative's firm without disclosure | Fraud |
In some places, reporting your employer's harm to clients by sharing private company information is illegal. Many would still call it ethical whistle-blowing.
New laws often respond to recent unethical behaviour: the US Securities Acts of 1933 and 1934 and Glass-Steagall after the 1929 crash, Sarbanes-Oxley after Enron and WorldCom, Dodd-Frank after the 2008 crisis.
Laws are specific. Ethical principles usually set a higher standard and need more judgment about the impact on many stakeholders. New laws can even open room for new unethical behaviour.
Check yourself
Decisions improve when ethics is built into a firm's decision-making process. That needs a code of ethics to guide it and support from senior management.
A framework helps you identify the issues, see them from several perspectives, build judgment and avoid unanticipated ethical consequences. The curriculum's framework has four steps:
Kavya, a portfolio manager, is offered a bonus for moving clients into her firm's new fund.
Check yourself
| Idea | Key point |
|---|---|
| Ethics | Balance self-interest with impact on stakeholders |
| Code of ethics | Communicates values; standards set a minimum |
| Profession | Expertise, a code, monitoring, client focus |
| Investment | Entrusted wealth, intangible product |
| Fiduciary | Stronger than suitability: best interests |
| Challenges | Situational influences beat character |
| Law vs ethics | Ethics is a higher bar, more judgment |
| Framework | Identify, consider, decide and act, reflect |
That's the reading.
Now test it on exam-style questions while it's fresh.