The preamble to the NAIFA Code of Ethics addresses the role of a financial advisor as a liaison between purchasers and suppliers of financial products. The preamble further states: “Inherent in this role is the combination of professional duty to the client and to the company as well. Ethical balance is required to avoid any conflict between these two obligations.” What are these obligations and how is the balance maintained?
Duty to the client
In the application of a financial product, an advisor owes a client rigorous consideration of the suitability issues involved in the client’s use of the product. This includes the obvious compliance issues of the client’s financial objective, risk tolerance and time horizon, as well as the client’s general comfort with the product. Finally, an advisor owes a client prompt, time-sensitive performance in the implementation and service of any financial product.
The insurance company overreached its responsibility to May’s client, ignoring her position as the client’s financial advisor.
Duty to the company
The advisor owes the supplying company honesty in all factors pertinent to it providing the product. This includes suitability questions the company may have to ensure rightful application of investment products, underwriting questions to allow for accurate risk evaluation and pricing for insurance products, and both considerations for products that involve investment and insurance components. In addition, as with duty to the client, a financial advisor owes the company prompt, time-sensitive performance in the delivery of client funds and paperwork pertinent to a client’s acquisition and maintenance of a financial product.
Maintaining the balance
These two duties are complementary and not in conflict if the financial advisor, the client, and the insurance or investment company function in an ethical manner. Let’s consider a hypothetical situation to see what can occur when a supplying company decides to expand or reduce its ethical obligation to a client and a financial advisor.
The risk-averse client
John Caraway is a 75-year-old widowed college professor with a sizable investment portfolio. His wife recently passed away, and Dr. Caraway is only now returning to his normal routines. May Cardinas is Dr. Caraway’s financial advisor. Recently, Dr. Caraway had a large CD mature, and he chose to invest the money in a variable annuity with Cardinas.
Then, Dr. Caraway received two mailings from the insurance company underwriting the variable annuity. The first letter promoted the ease of transferring funds from the fixed account to securities-based sub-accounts. The second built upon the message of the first, promoting the investment benefits of dollar-cost averaging through transfers from the fixed account to more risk-oriented sub-accounts.
Dr. Caraway thought Cardinas had sent the mailings, and he called her to complain. “May, why did you have these letters sent to me about making riskier investments with the new annuity?” he asked. “If I knew I was going to have this kind of pressure, I would have invested the money elsewhere.”
Cardinas didn’t know what he was talking about, so she asked him: “What do you mean, Dr. Caraway? I haven’t sent you any letters in the last month or so.”
“Two letters arrived from the insurance company stressing how easy it is to move money out of the fixed account, and how beneficial dollar-cost averaging is,” he said. “If you didn’t send them, doesn’t the company know you are my financial advisor?”
“Now I understand,” Cardinas said. “Dr. Caraway, developing a portfolio with appropriate risk and other characteristics was the whole point of the asset-allocation exercise we completed last year. Keeping the CD proceeds in a fixed product is very consistent with the dictates of your allocation. If you like, I’ll contact the company and get the mailings stopped.”
The ethical balance shift
The balance of Cardinas’ obligation to her client and the company had changed. The insurance company overreached its responsibility to Cardinas’ client, ignoring her position as the client’s financial advisor. By overreaching, it inadvertently attempted to expand its interaction with the client in an ethically questionable way, reducing Cardinas’ obligation to her client, and increasing her obligation to the company by making her dependent upon the result the company might achieve from dealing directly with the client.
Probably the most direct action Cardinas can take involves contacting the carrier, explaining the problem with the mailings to Dr. Caraway, as well as the inappropriateness of proposing an investment decision for her client without consulting her. If constructive, corrective action is taken, the balance of May’s duty to client and company will be restored.
Frank C. Bearden, Ph.D., CLU, ChFC, is a field manager, financial advisor and agent in San Antonio, Texas, and a member of NAIFA-San Antonio. You may reach him at firstname.lastname@example.org.