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Ethical Issues For Financial Advisors

The collapse of Enron and Worldcom brought ethical concerns to the forefront of public scrutiny. Their demise caused thousands of Enron and Worldcom employees to lose all of their retirement savings, and provided a wake-up call to investors across the country who held their entire retirement savings in a single stock. The failure to educate those employees about the importance of diversification was perhaps more than mere corporate or fiduciary oversight.

SEE: Business Owners: Avoid Enron-esque Retirement Plans

These headline-grabbing collapses are just two examples of how our modern maze of business models, methods of practice and investment strategies have substantially blurred traditional ethical boundaries. Even scrupulously honest financial planners can now face real dilemmas when trying to do the right thing for their clients. Read on as we explore some common dilemmas investment professionals face, and help provide guidance on how you can tackle them.

Uncharted Territory
A generation ago, both the tax code and the financial products and services available were simpler than they are today. For example, if someone wanted to buy stock, a stockbroker would place the trade. If someone needed permanent life coverage, a whole life policy was issued. But now, planners must decide if this traditional approach is better, or whether the client would be better off buying any number of the diverse modern products available.

The modern maze means every financial planner faces an ethical dilemma when trying to do the right thing for a client.

Ethics for CFPs®
In light of these dilemmas, the Certified Financial Planner® Board of Standards has issued a substantial revision and upgrade of the ethical requirements that it expects from its certificants. Some of these new requirements include:

  • Putting the client's interests ahead of the CFP® certificant's interests at all times and in all situations. This is conceptually a step up from the previous standard of "reasonable and prudent professional judgment" that was formerly in the code. The change essentially raises the code of conduct for any issue or situation that is not considered to be within the bounds of financial planning services, per se, to a level just below that of a fiduciary.

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