Financial advisors are expected to uphold certain ethical standards when managing client finances and offering advice. Establishing and adhering to a code of ethics can allow you to build a more sustainable business if you’re able to foster trust and client loyalty.
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Why Advisors Need a Code of Ethics
Setting ethical standards for your advisory practice serves multiple purposes. In creating a code of ethics, you’re outlining the principles and values that are most important to your business. You may also use your ethics code to outline company standards for client-advisor interactions, as well as guidelines for employee interactions.
Having a formalized code of ethics is an opportunity to underscore your brand messaging and reaffirm your commitment to providing clients with the highest standard of service. When considered within the broader landscape of your company culture, your ethics code can also be useful in building and retaining a team of dedicated employees.
Establishing a code of ethics may also be a requirement for ensuring compliance with regulatory guidelines if they apply to your business. Failing to meet SEC compliance rules can result in civil fines and potentially cause damage to your firm’s brand image.
Ethical Standards for Financial Advisors
The ethical standard an advisor is subject to is largely dictated by their status as an SEC-registered advisor or the professional designations they hold. Registered investment advisors (RIAs), for example, are required to act as fiduciaries. Under SEC Rule 204A-1, they’re also required to develop a code of ethics that includes, at a minimum, all of the following:
- Rules governing standards of business conduct following the advisor’s status as a fiduciary
- Federal securities law compliance requirements for supervised persons
- Personal reporting requirements for “access persons” who engage in securities transactions
- Reporting requirements when a violation of the advisor’s code of ethics occurs
- Dissemination of the code of ethics among the advisor’s supervised persons and collection of their acknowledgment of said code
Certified financial planners (CFPs), meanwhile, are expected to adhere to the ethical standards set by the CFP Board. Under these standards, certified financial planners must:
- Adhere to a fiduciary standard, exercising a duty of care, a duty of loyalty, and a duty to follow client instructions
- Perform their professional services with integrity, competence, and diligence
- Disclose potential conflicts of interest should they arise
- Operate with professionalism, using their sound and objective judgment to guide decision-making
- Comply with all applicable laws and regulations
- Ensure confidentiality and privacy when managing client accounts
- Provide information to clients in accordance with CFP Board standards and ensure that all information being communicated is accurate
- Avoid making false or misleading statements regarding compensation
- Follow professional standards when engaging additional persons to provide financial services to clients
- Use reasonable care and judgment when making technology recommendations
- Refrain from borrowing or lending money and commingling financial assets
Advisors may also be subject to codes of ethics at an organizational level. Members of the National Association of Insurance and Financial Advisors (NAIFA) are expected to agree to the organization’s code of ethics. The American Planning Association and Financial Planning Association also have ethical standards that members are required to uphold.
What to Include in a Code of Ethics for Financial Advisors
As mentioned, registered advisors must follow SEC rules for drafting a code of ethics. At the outset, your ethics code should include wording that specifies who it pertains to and what purpose it’s intended to serve.
Those covered by a code ethics include investment advisor representatives (IARs) and supervised persons. Under the Advisers Act, a supervised person is any of the following:
- Partners, officers, and directors
- Any employee of an investment advisor
- Any individual who provides investment advice on behalf of the investment advisor and is under their supervision
Standards of conduct typically come next. Here, you’ll explain the responsibilities of IARs and supervised persons and the professional standards they’re expected to meet under the fiduciary standard. In addition to detailing how an IAR or supervised person should act, you may also include a list of prohibited behaviors, such as promoting the interests of one client over another or attempting to defraud clients in any way.
Next, your code of ethics should include a section that covers the handling of confidential client information and the material non-public information. Specifically, supervised persons must refrain from using insider information to trade securities for personal gain or sharing that information with others for gain.
The SEC also requires advisors to include a section covering reporting of personal securities transactions and holdings for access persons. An access person under the Advisers Act is any supervised person of an investment advisor who:
- Has access to nonpublic information relating to a client’s purchase or sale of securities
- Has access to nonpublic information regarding the portfolio holdings of any reportable fund
- Plays a role in making securities recommendations to clients in advisory accounts or has access to such recommendations that are nonpublic
The last two required sections of your ethics code should cover compliance requirements, including compliance certification and consequences for failure to comply. Again, you’ll need to ensure that everyone subject to your ethics code acknowledges that they’ve received a copy of it.
A chief compliance officer (CCO) is typically tasked with creating a code of ethics for financial advisors, with help from other key members of the firm. All advisory firms that are registered with the SEC are required to appoint a CCO.
Frequently Asked Questions
What Is the Fiduciary Rule for Advisors?
The fiduciary rule requires advisors who act in a fiduciary capacity to do so in the best interest of their clients. The Department of Labor introduced the fiduciary rule in 2010 as an amendment to the Employee Retirement Income Security Act (ERISA) of 1974. Since then, the DOL has introduced additional proposed rules that would expand the definition of who is considered to be a fiduciary.
What Is Unethical Behavior for Financial Advisors?
Broadly speaking, unethical behavior is anything that goes against the code of ethics you’re expected to follow as a financial professional. Examples of unethical behavior include:
- Encouraging clients to purchase certain investment products that are not in their best interest in violation of your fiduciary duty
- Misusing client assets for personal gain
- Making false or misleading claims about an investment’s performance to a client
- Participating in insider trading
Advisors who commit a breach of fiduciary duty may be held liable for any financial damages clients suffer as a result.
How Often Should a Code of Ethics Be Updated?
There’s no industry standard for how often advisors need to update their ethics codes. You may choose to update yours every two to three years or at a minimum, review it once annually to determine if any updates are needed.
Bottom Line
Writing a code of ethics for your business is an important compliance requirement if you’re a registered investment advisor. And even if you aren’t subject to SEC regulation, having a written ethical code that you and your employees are committed to following is a good business practice to follow.
Tips for Growing Your Advisory Business
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- If you’re a certified financial planner, you’re required to complete two hours of ethics continuing education coursework every two years. That’s in addition to 28 hours of continuing education in the other seven principal knowledge areas identified by the CFP Board. You can find CE ethics courses, both free and paid, offered online.
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