Ethical Standards You Should Expect From a Financial Advisor

The American Association of Individual Investors (AAII) once conducted a study to see how trusted financial advisors were. When asked how much people trust the financial services industry to act in the best interest of its clients, over 1,900 respondents answered as follows:

  • 17% of respondents trust the financial services either "a lot" or "a little".
  • 19% of respondents neither trust nor distrust their advisor.
  • 65% of respondents mistrust the financial services industry "a lot" or "a little".

Ethics are the moral principles defining someone's actions. It doesn't matter how technically sound a financial advisor's recommendations are: Without principles and standards behind them, there isn't any validity to their services. So how can investors find an ethical financial advisor?

In this article, we'll describe how you can choose wisely if you know which entity regulates your advisor, which professional designations to look for, and the warning signs of a bad advisor.

Key Takeaways

  • There are online resources to evaluate whether a financial advisor has a clean history or has received disciplinary feedback.
  • Most investors historically have not trusted the financial advisory industry.
  • Financial advisors may be regulated by FINRA, the SEC, or both.
  • Unethical financial advisors usually have warning signals including inconsistent reporting to clients, product pushing, and guaranteeing future results.
  • Ethical financial advisors prioritize learning about your personal history, explaining unfamiliar financial matters, and planning for their succession in they retire.

Know Which Entity Regulates Your Advisor

Let's start with the good news: there are rules in place to make sure advisors act ethically. The two regulatory organizations that oversee financial services are the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). FINRA regulates the sale of financial products such as insurance policies, annuities, and mutual funds. The SEC regulates the giving of financial advice. Some advisors are only regulated by one of these entities.

Advisors covered by either regulatory body are bound to sell a product that is suitable for you based on your answers to questions about your age, other investments, annual income, liquid net worth, investment objectives, investment experience, time horizon, risk tolerance, and other factors.

Advisors are often restricted by suitability standards or fiduciary standards. Those who meet the more stringent fiduciary standards are termed advisers (not advisors) in the financial industry.

  • Suitability standards stipulate that advisors must consider each individual investor's position and provide guidance specific to what is suitable for the investor's needs.
  • Fiduciary standards require advisors to consider their client's needs before their own.

Registered investment advisers, trustees of estates, executors of wills, and some Insurance agents, especially those who manage money on behalf of clients, are fiduciaries and are advisers (not advisors).

Look for Advisors With Well-Known Professional Designations

If your advisor is only SEC-regulated, that person is held to a high professional standard. If your advisor is only regulated by FINRA, there are some gaps in their fiduciary duty.

That's where professional designations come in handy. For example, Certified Financial Planner (CFP®) must uphold the fiduciary standard even if they are not FINRA-regulated. As the CFP license is entirely optional, it is generally a demonstration of good faith.

Each professional designation has its own set of independently managed standards. Chartered financial analyst CFA charter holders are bound by a code of ethics and professional standards, and they are required to attest annually that their actions have been bound by those standards.

Other credentials to look for are personal financial specialist (PFS) and chartered financial consultant (ChFC). Each license has its own ethical standards. Licenses requiring examination will be covered by varying ethical guidelines and may require continuing professional education.

Warning Signs of a Bad Advisor

There are generally some warning signs you can spot when working with an advisor. Though there may be extenuating circumstances, here are some items to watch for:

Changes in Performance Reporting

Because there is no standard for performance reporting, there is a lot of room for manipulation, and many advisors switch between different formats of performance reporting so they can choose the format that makes them look best. If your portfolio performance isn't as strong, you deserve to know it.

When you begin working with a new advisor, ask to see example copies of reports from other clients, even if their names must be removed or identification information omitted. Unless there is explicit reason to expect your reports to look different, you should expect to see similarly-formatted reports.

Once you have an established relationship, ensure the information and format you receive are consistent. Your advisor should not omit information previously provided, and their data sources should remain consistent.

Verify that prior quarter information is properly rolled to the next quarter (i.e. ending balances turn into starting balances), and always ask for originally-sourced information like statement exports directly from brokerage services.

Product Pushing

Advisors that sell a product rather than their fiduciary advice are at great risk for unethical behavior. This unethical behavior arises when your financial advisor receives a commission for the sale of specific financial products. Those products may not fit with your long-term goals, but your advisor may still recommend them to you to get the commission.

There are several things to consider here. First, the more financially educated you are, the easier it will be to detect these products.

Second, ask your advisor about their business relationships. Disclosure is a professional obligation.


Financial advisors must use the historical performance of various investment options in order to make a roadmap of where they think that may lead. However, past performance is not an indication of future results.

When discussing investment options, ask your advisor about the likelihood of specific outcomes, good and bad. For example, if your advisor is suggesting you change your portfolio allocation to generate higher returns, ask how likely it is that the projected outcome will occur.

Be wary of an advisor who promises a certain return. That's fortune-telling.

Flashy Behavior

Advisors may use flashy behavior to create an atmosphere of wealth and financial success. They may have done well for themselves in the past, but their prior success or appearance of success should not determine your choice of an advisor.

Be aware when your discussion with financial advisors feels less like advice and more like advertising.

Incomprehensible Jargon

If an advisor communicates in a way that you don't understand, they are doing a poor job of relating to you and your lack of professional-level knowledge of the financial markets.

Don't be shy of asking an advisor to explain acronyms or phrases you're unfamiliar with.

This opaque jargon might not even relate to financial markets. If it's unclear what your financial advisor's fee structure, investment process, or overall investing philosophy is, it's up to the advisor to make it more transparent.

If that doesn't happen, it's a warning signal.

Inadequate Past Performance Compared to Benchmarks

Investors can compare the returns a financial advisor has achieved to those of benchmarks like the S&P 500, the Barclays Capital Aggregate Bond Index and others that resemble the advisor's investment holdings.

The great thing about historical data is it does not play favorites. If one fund outperforms another, it's as simple as that.

Your financial advisor should be willing to demonstrate their success compared to the markets and even compared with other financial investing firms. Publicly-traded funds can act as the data point to compare again.

What to Expect from a Good Advisor

Good financial advisors put the client's interests first. They also have respected professional designations such as CFP, CFA, PFS and/or ChFP.

They also are compensated with fees, not commissions.

Here are some additional characteristics to look for

A Comprehensive Understanding of Your Situation

The advisor should thoroughly discuss your needs and circumstances with you, then carefully match products and services with your situation.

The CFA Institute's Statement of Investor Rights is a list of 10 principles intended to help those who buy financial service products demand the professional conduct they deserve.

When you first meet with a financial advisor, expect much of the conversation to not be about money at all. Good financial advisors get to know their clients, what is going on in their life, and what they dream to achieve.

Once your advisor knows where you want to go, he or she can begin crafting the plan to get there.

A Manageable Client Base

Make sure the advisor does not have so many clients that they will not be able to devote sufficient attention to you. It's great if your advisor is in high-demand; however, high-quality advisors know when they are at capacity and turn away business to prioritize existing clients.

A Solid Business Continuity Plan

If your advisor retires, changes professions, or passes away, there should have a plan for who will take over the management of your account. Prior to your advisor's retirement, your advisor may ask to meet with both you and the incoming advisor to make sure all parties are on the same page about the transition.

A continuity plan may be different if your advisor is leaving the company. Often, firms will not allow financial advisors to engage clients once the advisor has put in their notice. The advisor's e-mail and telephone number may also be disconnected to prevent the advisor from taking clients with them to their new company.

Do not be alarmed if this occurs. Your advisor may decide to reach out to you.

Lack of Pressure

Your advisor should give you all the time you need to make decisions. Unless there are legal or imminent tax implications to immediately address, you shouldn't feel like you're on a deadline.

Most of the guidance from a good financial advisor is geared towards long-term success, so any short-term deadline or goals are simply single hurdles along a long path.

Clear Communication

Your advisor should prepare an investment policy statement that explains the plan for your finances in language you can understand. All communications from your advisor, including the explanation of fees, should also be easy to understand.

A Clean Disciplinary History

Check the SEC's Investment Advisor Public Disclosure website, FINRA's BrokerCheck website, and the North American Securities Administrators Association's Check Out Your Broker website, which recommends the NAPFA.

While you want to hire someone who is SEC-regulated and therefore a fiduciary, that person might have been registered with another regulatory authority in the past. You can check all three places to confirm that the candidate has a clear disciplinary history.

Special Considerations

Once you've hired someone you think meets these standards, make sure to evaluate your financial advisor on an ongoing basis. Are your needs being met? Has the advisor done what was promised? Have there been any unexpected fees? Is your advisor available to you? Are your questions answered quickly and satisfactorily?

If you have experienced problems in any of these areas, discuss your concerns with your advisor. If the response is not satisfactory, it's time to look for a new advisor.

Are Financial Advisors Ethical?

Like any profession, there are ethical financial advisors and some unethical financial advisors. Though there are many professional certifications and memberships that enhance the validity and standards of the industry, anyone can encounter a bad apple.

Fortunately, financial advisors are held to a very high standard across multiple regulatory boards. This may not guarantee ethical behavior, but it's a tremendous start to help clients feel more secure when working with an advisor.

Can I Sue My Financial Advisor?

Yes, you can sue your financial advisor. If you can prove the advisor failed to abide by FINRA rules and regulations and you suffered an investment loss as a result, you can file an arbitration claim to try for financially compensation for the loss.

How Do I Know My Financial Advisor Is Ethical?

Just as you can't really know whether your doctor is ethical, a matter of morals is a judgment call you must make every time you interact with your financial advisor.

Take note of how they act and what they say over time. As you build your relationship with them, you'll continually gather evidence on whether they have earned your trust or not.

The Bottom Line

It's an unfortunate circumstance in any profession that people with more knowledge than their clients may take advantage of those they do business with.

With a little insight and common sense on top of the law, you may be able to avoid the unethical actions of some professionals that give the finance industry a bad reputation.

Article Sources
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  1. American Association of Individual Investors. "Uses and Misuses of Ben Graham-Style Investing."

  2. Financial Industry Regulatory Authority. "Investment Advisers."

  3. Code of Federal Regulations. "Part 275 - Rules and Regulations, Investment Advisers Act of 1940."

  4. Securities and Exchange Commission. "Frequently Asked Questions Regarding Disclosure of Certain Financial Conflicts Related to Investment Adviser Compensation."

  5. CFA Institute. "CFA Institute of Statement of Investor Rights."

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