Introduction to Ethics in the investment industry

Trust in the investment industry is enhanced when workers in the industry make decisions that are ethically sound. In 2013, a study by CFA Institute and Edelman examined trust by investors in investment managers and explored the dimensions that influence that level of trust. The creation and maintenance of trust depends on the behaviour, actions, and integrity of entities participating in the financial markets. Ultimately, trust relies on the actions of individuals participating in financial markets, including those working in the investment industry. In the end, trust depends on individuals choosing to comply with rules and to act ethically.

A culture of integrity based on ethical standards can be built and developed at a personal and business level by applying the following four-step process, as suggested by Meder. This process can be adapted to be relevant for anyone:

• Set high standards and put them in writing,
• Get adequate and ongoing training on professional and ethical standards,
• Assess the integrity of individuals and groups you encounter, and
• Take action when breaches of integrity and ethical standards are observed.

Sometimes, the ethical dilemma and the appropriate ethical response seem obvious. To identify and deal with an ethical dilemma, it is useful to be able to consult a framework that guides ethical decision making. Individuals following such a framework are more likely to identify ethical dilemmas and to ensure that they and others around them behave ethically.

Investment products and financial services offered have also increased in breadth and complexity. Investment professionals help provide access to and information about these investment opportunities and the financial markets. Investment professionals are involved in making and helping clients make investment decisions and in creating products that help with and add value to the investment decision-making process. Individuals who work in the investment industry but outside of the investment management functions are also critical to the functioning of the investment industry. The decisions and actions of all the individuals in the investment industry may directly or indirectly affect clients, prospective clients, employers, and/or co-workers.

Typically, these professionals rely on the support of others to provide investment services to clients. Such support also extends to the use of third-party information, such as credit ratings and investment research. When using such support and information, individuals working in the investment industry must be careful and conduct due diligence to ensure the reliability of the information and its sources. Investors are unlikely to have confidence in and more broadly, the public is unlikely to trust in the fairness of financial markets if there is not a general belief that individuals in the investment industry behave ethically. Some of the factors, including success of the investment industry, affected by ethical standards.

To establish and maintain high ethical standards, it is critical to understand general obligations to clients, prospective clients, employers, and co-workers. Considering how to meet these obligations will help guide behaviour. 

1. Obligations to Clients : the client relationship is critical to the functioning of the investment industry. A conflict of interest arises when either the employee's personal interests or the employer's interests conflict with the interests of the client. The adviser also has a professional obligation to exercise independent judgment when identifying and advising on suitable investment products and to pursue the best interest of the client at all times. Particular care must be taken to ascertain whether an adviser's interests have the potential to conflict with the investment goals and best interest of a client. The adviser may be tempted to recommend the product that generates the highest commission to the adviser when some of the other products would actually be better suited to the client's investment goals. In this conflict of interest, the adviser may inappropriately make a decision based on adviser interest and not act in the client's best interest. The exception to the rule that those working in the investment industry should put the interests of a client first is when this would harm the integrity of financial markets.
2. Obligations to Employers : obligations to employers include providing services as agreed on in an employment contract, following or executing supervisory directives as required, and maintaining professional conduct. Loyalty, in the context of the employment relationship, incorporates the expectation that employees will work diligently on behalf of their employer, will place their employer's interests above their own, and will not misappropriate company property. Misappropriation may occur when an employee has access to company assets that are difficult to protect, particularly trade secrets and intangible assets, such as client lists, stock selection models, the company's employee compensation structure, or portfolio management procedures. Employees are expected to carry out their assigned responsibilities with competence and care. The efficient operation of the company can be compromised if employees do not act competently and carefully. If an employee does not feel capable of carrying out a task, he or she should either develop the necessary skills, work with others to complete it, or decline the task. This situation may not immediately seem like an ethical dilemma, but when an individual accepts responsibility to complete a task, he or she has an ethical obligation to be capable of completing the task efficiently and with the appropriate level of knowledge, care, and skill.
3. Obligations to Co-Workers : individuals in the investment industry are obliged not only to treat clients and their employer with fairness and respect but also to apply the same principles to their co- workers. If individuals do not perform their work carefully and competently, they may adversely affect the tasks of co-workers and the overall success of a team. In a worst-case scenario, the lack of competence and care by one worker can reflect on others and result in the loss of trust in one or more co-workers and perhaps even in their dismissal. By contrast, ethical conduct including competence, care, and respect towards co-workers not only contributes to the achievement of client and employer goals but can also enhance your career as you develop social and communication skills and, in some cases, team leadership skills. In addition to fostering your own professional development, you have an obligation to support the professional development of co-workers, which includes helping co-workers understand, promote, and follow ethical practices as well as encouraging others to adhere to professional obligations, such as the preservation of client confidentiality. Supervisors are expected in addition to fulfilling the obligations of all employees to execute supervisory duties responsibly, which includes ensuring compliance with ethical, legal, professional, and organisational standards. Supervisory obligations are important to preventing, detecting, and managing violations of standards that put the client's trust at risk.
4. Identifying Your Obligations : the complexity of the investment industry and the variety of roles, functions, and services that constitute it can make identifying and fulfilling duties and obligations to clients, employers and co-workers a challenge.

You might want to put the following questions to your supervisor or manager to help identify key obligations and ethical dilemmas that may arise:

• What is my role in the company and in what way do I contribute to its success?
• What potential individual and organisational conflicts of interest should I be aware of?
• What measures do I need to take to ensure I have sufficient competence to fulfil my role?

They can be adapted to identify and consider standards applicable to any employee's work environment.

Slahdji Mohamed Oussalem