March 20, 2011

Can ‘profit’ exist without ‘ethics’ in FP Profession?

Sadique Neelgund

In recent years, instances of frauds & unethical practices have risen and the world is witnessing a heated debate over ethical standards when delivering financial planning to clients. The financial planning industry is making an arduous attempt to place itself as an ethical profession, with its own history as a product sales channel.

The industry is striving to reduce conflicts of interest and build business models that first and foremost meet the needs of clients. Most clients are surrounded with doubt & fear created by conflicting advice at critical points of the financial planning process. In turbulent times like now ethical practice will certainly not go unnoticed and will attract extra-appreciative clients, positioning ethical practice in its rightful place.

Unethical practice ultimately break down

Recently, an industry observer asked me whether I thought professional ethics really made a difference to the success of financial planning business and whether I believed that ethics & profit could coexist in today’s competitive environment. “The answer to this is very simple,” I replied. “You ask me – Can ethics coexist with profit in the financial planning industry? I ask you – Can profit exist without ethics in the financial planning industry?”

In a nutshell, it’s high time that we understand ethics & profit are not oxymorons. Unethical practices which ignore values such as honesty and integrity in conducting their financial planning business ultimately break down.

Tell your client things that you may not want to reveal

So, what does “ethical” mean to financial advisors? It boils down to two things: first, a financial advisor should direct his/her efforts towards benefiting the client’s goals before his/her own, and secondly, communications between financial advisors and clients should be truthful. Trust and integrity are the watchwords to build a successful client-centered practice.

The reliance of the clients on financial planning enforces an obligation on financial advisors to maintain high standards of technical competence, morality, and integrity. The most challenging part about ethical behavior is the requirement to be honest – to tell your client things that you may not want to reveal.

Common unethical practices  

Doubtlessly, there are number of critical ethical practice issues across the financial planning industry. Churning and coercive tied selling are classic examples of such unethical practices. Churning refers to repeatedly moving a client in and out of an investment for the purpose of generating commissions, without taking into account client’s investment objectives.

Coercive tied selling means any practice wherein a financial advisor imposes undue pressure on the client to buy a product from a particular person or institution as a condition for getting another product or service. A financial advisor’s actions must be guided entirely by the client’s financial needs and not by any other factor.

Financial institutions create irresistible offers

The interaction between financial advisors and financial institutions (such as insurance companies, asset management companies, banks, etc.) is almost as old as the financial planning profession itself. There is nothing unethical about it till the time the ultimate beneficiary of this relationship between financial advisors and financial institutions is the client. Regrettably, there are often conflicts of interest between financial advisors and their clients.

In many cases, financial institutions create irresistible offers for financial advisors to promote their products. There is an urgent need to contain this interaction between financial advisors and financial institutions within acceptable limits. In the entire process of delivering financial planning and advice, the financial advisor should ditch any business arrangement that might, because of professional progress or personal gain, influence his/her decisions.

Ethics should be part of behaviour not curriculum

Ethical practice is part of the curriculum in many financial planning education programs, true; but much more than inclusion of the subject in the curriculum is required for Certified Financial Planners (CFPs) to imbibe ethical behaviour as their second nature. It is unquestionably important for the students of financial planning education programs to understand their special responsibilities as financial advisors.

Making the decision to become a financial advisor essentially involves undertaking specific moral responsibilities irrespective of the personal reasons one has for making that choice. It is vitally important to communicate, to the students of financial planning, the ethical issues faced by financial advisors.

Further, the students should also know the reality of the financial planning practice today. Group discussions on the subject of ethical practice in a self-examining format can also lead to better understanding. For handling and resolving ethical dilemmas, the contents of this subject guide should be designed to provide a basic analytical model for the students.

What would be your advice to yourself in case…? 

Every financial advisor should try to vividly imagine himself/herself in the place of their clients. This is crucial for the financial planning profession because, if financial advisors can imagine themselves in the place of their clients, they can provide better service. There is a need to develop and foster this imagination.

Ethics is not mere outward conformity with the common rules laid down. To act in conformity with the objectives and purposes of the Code of Conduct is necessary, but not sufficient. Conformity is not an indicator of professionalism. Compliance with minimum regulatory standards is not enough. To act ethically is to act rationally, in a way consistent with your values, your principles and your beliefs.

There are reasons to be optimistic

The financial planning profession was permeated by a code of ethical conduct right from the beginning. It is essential that the concerned authorities put in place effectual measures to maintain ethical conduct. After SEBI scrapped the entry load for mutual funds, IRDA capped charges which the life insurance firms can levy on customers of their Unit Linked Insurance Policies (ULIPs) in order to help the subscriber move towards long-term savings-cum-protection.

With a view to protect the interests of clients, these moves are welcome as they would help to develop the financial planning industry on ethical lines. Clearly, a lot more needs to be done in this field but I think there are reasons to be optimistic.

I am not accusing CFP Professionals, but… 

I believe it’s time we ask ourselves if we have, in the true sense, developed the indispensable place of ethical practice in the financial planning industry. Financial advisors are to protect clients’ financial health and promote the interests of the clients above everything else.

Before I conclude I would like to state that I’m not accusing the financial planning profession in our country. There are, and I personally know of many CFP Certificants, who are still helping people succeed in every aspect of their financial lives. But what about the remaining lot?

In the immortal words of Thomas Jefferson, “Whenever you do a thing, act as if the entire world were watching.”


Authored by,

Pooja Chopra Goel

Financial Advisors Association of India (FAAIDA)
Mumbai | Kandla

15 Thoughts to “Can ‘profit’ exist without ‘ethics’ in FP Profession?”

  1. Pooja — I read your article and principally you are right but question is how do your drive your idea in.

    You know “It pays to be dis-honest” and that is the structure created at every level of our community.

    Now to counter this — it is essential that we create a more remunerative business model for an ethical financial planner . This is what I believe the way to weed out the prevalant mal-practices.

    Please give ur ideas on the same.

  2. Hi Pooja,

    I second your thoughts.

    Just would like to add a contra quote – Henry Ford said “Quality means doing it right when no one is looking.” even ethics means doing it right when no one is looking. So right now when clients are not looking at what you are doing – you have to do it right. This will set the foundation of trust that is needed for long term relationship with client.

  3. By Prateek Jasoriya on Linkedin Group

    I agree that the ethics are the most important aspect of financial planning….as it the ethics which makes you a disciplined planner…though it may not sound good in short period….but if we take a long period of say more than 2 yrs…..ethics is what comes above all…..and without it, knowledge is of no importance….

  4. Pooja.. I wholeheartedly ratify your opinion. It is more easier to close calls with products which have already generated a lot curiosity and positivity with the media support and a mental drilling with emotional selling, then to try to convince clients to go in for a pure term with investments to be handled independently. The amount of time I have spend in convincing clients for a pure term plus MF etc has been 4 to 5 times and would have closed deals with endowments or ULIP’S much faster and definitely the incentives would be more ( a years fees would have been earned in one deal ! ) Sounds fine to inform, read, preach but when it comes to practice.. its very difficult and frustrating at times. For CFP’s the market forces and numerous pulling factors have to be dealt with. To sum up your thoughts and to also add to Hemant’s views – there is only one word ” INTEGRITY”.

  5. Agrawal Rahul says:

    Hi Pooja,

    I completely agree with you and would like to thank you for writing this article. Ethics shall be considered as “no alternate choice available but to follow”. As there is no escape from hard work to grow in long run, ethics fuel hard work, so if one wants sustainable and growing business, ethics is the way.

    Compromising ethics may remunerate for some time but scalability is questioned, ethics also ensure peaceful sleep…

  6. Thank you for all your comments. I agree with most of your comments. Mr. Majumder I do agree, it is easier said than done. It’s a challenge. A challenge to resist resist temptations every day .Sure there’s a price, but there’s also a big pay-off. As pointed out by Mr. Beniwal, ethical practice will help us build long term client relationships. It is important to understand short-term compromises also make long-term customer relationships more difficult to form.

  7. I think Ethics is one topic which the financial advisory industry doesn’t want to speak about. and even if they do its only a lip talk. They have been part of this great mis-selling and lack the knowledge and skills to build a business model or practice model being ethical. But finally things are changing in favour of consumers

    I wouldn’t blame financial advisors for being in this soup. The industry has always incentivised for selling more and not for giving the right advice. maybe we can consider this as part of the financial planning evolution.

    Many of the CFP Certificants and aspiring financial planners have also sold ULIPs and NFOs, derivatives but they were part of the industry and forced to adapt to certain rules of game. Suddenly we cannot get up and say what we were doing was wrong. think practically. We have to have a transition model in place for such advisors who are willing to switchover to financial planning mode. there has to be a face saver and effective communication mechanism

  8. @ Pooja, you have interacted with many financial advisors being at the helm of Faaida. By any chance have you noticed a difference between an advisor with CFP and an advisor who just has AMFI and few NCFM certifications? Your frank views as a journo might be insightful for all of us here.

  9. Parmod Sachdeva says:


    Ethics are good for discussion and every likes it till the time these are not enforced upon him. Even client wants the best advice but at dam low price or preferably free. Even if he has to pay he says I am investing a small amount to begin with and shall invest more amount later on. That later on never comes why ? every body know the answer. Every one is asking the adviser to be Yudhishther among Kauravs. What about many so called experts on TV.

  10. First of all, I do understand your frustration Mr. Sachdeva. The moment I chose to write about ethics I knew it would raise a few eyebrows. Ethics is at once a strikingly simple and fiendishly difficult concept to grapple with, yet it is a worthwhile one to consider seriously. I can assure you one thing; ethics is definitely better for your wallet too in long term than cheating gullible clients. Believe me, it’s the thought that counts. It has been rightly said that don’t be afraid of experience, because the more experience you have, the more mature you become. I’m not trying to go all philosophical here… Just a point of view, may be… Who knows, you might even agree! If not now, someday!

    • Hi Pooja… this article has kicked off a good discussion on ethics. But as you rightly said “Ethics is at once a strikingly simple and fiendishly difficult concept to grapple with”. There is scope of quantifying the benefits of “ethical financial advisory practice” to justify the same. Maybe you would like to take this discussion forward with such an article.

  11. Great! Let’s talk facts in my next article!

  12. Badrish Nagaraj says:

    If one is not corrupt in his practices it shows in his action…. Ethics and integrity often goes hand in hand u know if we are not ethical in our family or society, it could be traced very easily as its a digital world……

  13. Now, who said being ethical does not pay? Seeking an answer; loud and clear… It pays big time time… I believe… We are witnessing it live… Across the country…

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