Bx2035 Ethics Essay - Ethan Shields PDF

Preview

Summary

Ethics essay for BX 2035 client relationships. This was graded 16.5/20...

Description

Financial Adviser Ethics Essay BX2035

Webster defines ethics as “a set of moral principles: a theory or system of moral values.” When it comes to financial planning and advice, this involves acting in the client’s best interest at all times by being trustworthy, competent, honest, fair and diligent. Ethics basically boils down to treating others like you would like your family and yourself to be treated by a professional service provider. In 2017, to improve the standards of education, training, ethical behaviour and professionalism for financial advisers, the Corporations Act was amended. Included in this amendment, was the obligation to abide by section 921E of the Act. This section required that all providers must comply with the Financial Adviser Standards and Ethics (FASEA). FASEA contains a five step Code of Ethics, which comes into effect on the 1st of January in 2020. These Code of Ethics address five core values; trustworthiness, competence, honesty, fairness and diligence. These are designed to encourage higher standards of professional behaviour within the financial services industry. The code also requires that financial advisers must act all times, in a manner that is consistent with FASEA’s twelve ethical standards. The case being presented today involves two retirees, Maxine and John, who saw advice from their financial advisor. Financial advisor, Jodie, made it evident to her clients that there was a risk of capital loss through the SOA prepared by Jodie. She stated that the investment in the managed growth fund was “not capital guaranteed”, “the balance may fluctuate daily due to changes in unit prices” and loss could occur if Maxine withdrew from the investment early. Through this SOA, Jodie recommended that the risk profile of the investment should be 90% in growth and 10% in defensive investments. Maxine and John accepted this advice and followed the advised plan. This originally performed well, but later took a large downturn and resulted in losses upwards of $172,000. After this issue, Maxine and John complained about Jodie’s advice, stating they thought their investment was 40% in growth and 60% in defensive investments, not the original 90% and 10% as stated by Jodie in the SOA. Since then, the couple have experienced many sleepless nights and are stressed about their future in retirement. Based on the case presented I believe fault falls onto both parties; however this essay will focus on the ethics of Jodie specifically. I firstly believe Jodie failed to comply with FASEA’s ethical standard five. Standard 5 states “Advisers must ensure their client understands the recommendations made, the benefits of any financial products recommended, the costs and risks involved in acquiring, holding and disposing of the recommended products. This means advice must be clear and simple”. I believe based on the case, Jodie made it very clear to Maxine that this investment was not capital guaranteed, however I do not believe Jodie made the investment amounts, nor the investment strategy, clear and simple. Jodie advised a 90% investment in growth and 10% in defence, however Maxine stated she thought it was 40% in growth and 60% in defence. For this confusion to exist, means Jodie did not clearly convey this information towards her clients. As such, Maxine and Jodie entered this arrangement with different ideas of how the investment money was being split. A second example of this can be found with Maxine’s actions following the sudden downturn that hit her investments. Jodie stated in the original SOA that there would be a risk of capital loss if

Maxine withdrew from the investment early. However, when the investment hit a decline, Maxine withdrew the investment, resulting in a capital loss. It is obvious that Maxine would not have done this if the risks had been explained clearer or reinforced regularly. This shows that whilst Jodie may have stated these risks in the beginning, it was not done so clearly and left room for confusion to exist. As such, this is all evidence that Jodie, as a financial advisor, failed to abide by Standard 5 of FASEA’s ethics. I believe Jodie has also failed to meet Standard 9 of FASEA’s ethical standards. Standard 9 states, “All financial product advice and all financial products offered to a client must be offered in good faith and with competence. Advisers must act honestly, and in the best interest of the client, in providing advice and making recommendations.” Maxine was obviously looking to make more money through an investment; however, she and her partner are retirees, and do not have large amounts of disposable income. Jodie recommended an investment that was “not capital guaranteed” and only recommended 10% for defensive investment. This does not seem like a safe investment for someone looking to have more money in retirement. Whilst a 90% growth investment would be more beneficial, it was not likely due to the investment type that Jodie proposed in her SOA. In my belief, Jodie should have done one of two things: A) Advised of a plan where the defensive investment was higher than the growth investment, in the chance of failure. Or; B) Advised of a capital guaranteed investment strategy. This would also fall in line with the 90% and 10% plan. Thus, I believe that Jodie failed to act in the best interest of the client and therefore failed to comply with standard 9 of FASEA’s Code of Ethics. Finally, I believe that by the breach of the previous two standards, Jodie has also failed to comply with Standard 6 of FASEA’s Code of Ethics. Standard 6 states, “advisers must take into account the broad effects of the client acting on their advice; these effects are not limited to effects on the client but may include implications for other family members of the client.” Maxine and John planned on using some of the investment to also be put towards an inheritance for their grandchildren. I believe that Jodie should have taken this into consideration when planning the financial advice for Maxine and John. As presented earlier, we came to the conclusion that the investment plan designed for Maxine was not ideal for the clients due to the lack of clarity on all associated risks, as well as the lack of consideration towards the safety of the investment. Because of these two breaches, it has also affected the wellbeing on the grandchildren by directly impacting their inheritance. As a result, Jodie has affected and caused implications for the family members of her client’s family, meaning she has explicitly failed to meet standard 6 of FASEA’s Code of Ethics. Through this analysis, I have stated three standards that I believe Jodie has broken as a financial adviser. Firstly, I believe she broke standard 5 by not making the risks or procedures of the investment clear enough to the client. Secondly, I believe Jodie failed to meet standard 9, by not acting with competence towards her client, and thinking purely about profit rather than the safety of her client’s investment. Thirdly, I believe that by failing to meet these previous two standards, Jodie has indirectly failed to meet standard 6, by impacting the inheritance her client’s grandchildren would receive. All of these are example

of unethical practices by Jodie, showing that by today’s business standards, is not fit to be the financial adviser of Maxine and John.

Bibliography Definition of ETHIC. (2019). Retrieved 22 August 2019, from https://www.merriamwebster.com/dictionary/ethic Code of Ethics | Financial Adviser Standards and Ethics Authority. (2019). Retrieved 22 August 2019, from https://www.fasea.gov.au/code-of-ethics/ FASEA Releases 12-Point Code of Ethics for Advisers | riskinfo » News. (2019). Retrieved 22 August 2019, from http://riskinfo.com.au/news/2019/02/11/fasea-releases-12-point-code-of-ethics-foradvisers/...