Acting professionally and ethically, you would think, would be the fundamental principal by which most asset managers, actually most people in general, strive to achieve and that clients expect. But time after time, scandal after scandal, it appears many professionals have failed. It is all too often that basic operating principals and ethics are thrown out the door as managers try to get a leg up on the market or beat the next guy.

The Enron scandal is exemplary of a lack of ethics that governed how the company operated. For anyone who heard the audio or read the reports on the traders laughing about how they caused the rolling blackouts in California, it is obvious professionalism and ethics were not indoctrinated into that company’s culture. Another high profile scandal was the Ponzi scheme spearheaded by Bernie Madoff, who stole millions of dollars. He egregiously hamstrung unsuspecting clients, wiping out many retirement accounts and nest eggs, and became a glaring example of the lack of integrity and professionalism.

Many business professionals get frightened when talk turns towards ethics, fearing that they will lose a competitive advantage. That need not be the case. Ethical behavior means performing due diligence, making assessments and drawing conclusions based on research and letting hard work, intelligence and knowledge be the driving force towards managing a client’s assets. To aid managers in understanding the requirements for ethical and professional behavior, some basic guidelines were developed by the CFA Institute, a professional organization for asset managers and analysts.

Ethical and Professional Guidelines

Doing what is right is perhaps the easiest way to describe acting ethically, but because everyone has a different understanding of “what is right,” we offer some guidelines to clarify the proper ways to act and conduct business.

  1. Ethical Behavior: First and foremost, managers should manage client assets and make investment decisions with “integrity, competence, diligence, respect and in an ethical manner,” according to the CFA Institute. A client’s interests should always be placed above the manager’s and all investment decisions should be made with “reasonable care.” Acting ethically is also about using sound judgment and maintaining professional competence. To achieve the ultimate goal of capital markets that benefit society, managers need to reflect on their actions and how they impact society as a whole.
  2. Professionalism: Managers should follow three basic rules to ensure professional behavior. First, they must have knowledge of the law or regulations in the region in which they operate, and they must never violate the law or assist in any violation. A common example of violating the law is committing fraud, such as pyramid schemes. Second, managers need to remain objective and independent when making all decisions, and those decisions should always be made to benefit the client. Third, managers cannot misrepresent their skills, performance or process.  
  3. Capital Markets: Making investment decisions and acting on material non-public information or knowingly and willfully distorting market prices are actions that will destroy the integrity of the capital markets. These actions should be avoided and managers should encourage peers to avoid them as well.
  4. Clients: The client relationship should be held on the highest pedestal. That means managers should act to the benefit of the client. Such activities should include ensuring the investment is suitable for the client’s needs, making sound investment decisions based on the stated investment process, provide performance data that is completely unaltered and accurate, and maintain strict confidentiality. An example that is pervasive throughout the industry is with respect to performance. Managers may want to show only a portion of a product’s track record rather than for full performance history. This action misrepresents the product’s full performance, and this action of cherry picking performance time periods is unethical. Failing to act for the benefit of the client violates the truest sense of professionalism. One of the greatest violations managers can make is to put their interests ahead of the clients. For example, a client should be given priority on investment decisions, and a manager should never front-run client accounts to the benefit of his/her own.
  5. Conflicts of Interest: Actual (or the appearance of) conflicts of interest should be avoided at all costs. Managers should disclose in full any matter that may interfere with their ability to manage the client’s assets fully, independently and objectively. This is an area that has a lot of ambiguity, and as such, managers should always err on the side of caution and disclose more rather than less. Potential conflicts can include fees received from another firm, benefit given for referrals or compensation paid to another party in return for product support.

The Bottom Line

Acting in an ethical and professional manner is the baseline from which all managers should approach their business and serve their clients. Even if laws and regulations fail to restrict behaviors that can be construed as unethical, managers should hold themselves to a higher standard. Keeping these guidelines in mind, managers will be rewarded when clients seek them out because of their professionalism and sound ethics. 

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