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Just Because You Can

All too often we use a test of ethical behavior based simply on escaping professional or legal sanction.

By Frank C. Bearden, Ph.D., CLU, ChFC

Some say the best test of ethical behavior is what an individual will do when no one is around. The reason this test is a persuasive test of character is because the person being tested has no encouragement or discouragement present to direct his behavior. Whatever the individual does will be done based on his inner conviction, or what we call values.

I suggest this is a fine test for a financial advisor to use to guide his professional behavior. All too often we use a much lesser test of ethical behavior, one that is based simply on escaping professional or legal sanction. Let’s use a simple situation to examine the difference between these two standards.

Case in point
A financial advisor is asked by his clients--a husband and his wife--to recommend a pre-retirement asset allocation that will adjust for inflation while remaining low-risk. The client couple has seven years to grow their portfolio. The stock market is beginning to rise, and the financial advisor is confident that this increase will continue for some time.

With this in mind, the financial advisor considers portraying a moderately aggressive portfolio as being low-risk, believing that the couple will benefit from significant growth of their investments. He considers providing less than complete disclosure to them, in what he perceives as the best interest of the clients. The advisor does not believe that the client couple would agree with the recommendation if he were to provide full disclosure.

When the advisor considers the disclosure he must provide because of his firm and because of regulatory authorities, he hesitates and changes his recommendation to a low-risk portfolio and handles this service for his clients truthfully and appropriately. The clients are pleased and the experience becomes another positive step in his relationship with them.

A lingering question
Our story seems to have a happy ending, as we realize the importance of the regulatory tools that make nondisclosure difficult. But one question remains: What will the financial advisor do the next time, especially if he finds a way to disguise the next recommendation so that his deceit is not recognized by the client or by regulatory authorities?

Will he proceed the next time toward making a recommendation that will not stand in the light of full disclosure? Will he face censor from his firm, regulatory authorities, and the courts due to his behavior?

Whether or not the financial advisor is eventually found out is not the key point of the story. The key is that so long as a financial advisor directs his professional behavior solely on the likelihood of being discovered, he and his clients are at serious risk because he is following an inadequate ethical standard.

What must the advisor do?
To solve this dilemma, the financial advisor must dig more deeply in his search for values. He must develop a deeper ethical standard that is more uniformly serviceable, based on values that do seek to serve his clients first. In the process of this quest for a better basis for professional service, the financial advisor must give up the flimsy ethical standard that promotes expeditious behavior "just because he can."

Frank Bearden, Ph.D., CLU, ChFC, is a consultant in San Antonio and works with financial advisors and adult education organizations. He is also an adjunct faculty member of the College for Financial Planning and a member of NAIFA-San Francisco. Reach him at

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