Guide to Code of Ethics for Financial Advisors

A financial advisor code of ethics is a written set of standards that governs how an advisor treats clients, and the rules depend on how you’re registered. SEC-registered investment advisors are required to adopt a written code and follow the fiduciary standard. CFP® professionals are also fiduciaries, but they additionally must adhere to the CFP Board’s Code of Ethics and Standards of Conduct, while broker-dealer representatives must follow Regulation Best Interest (Reg BI). Here’s what each requires and how to write an RIA code of ethics for your firm.

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Code of Ethics Compliance Requirements for RIAs

SEC Rule 204A-1 of the Investment Advisers Act of 1940 requires RIAs to develop a written code of ethics. This code must include:

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

RIAs can observe some best practices by drafting their code of ethics in plain English to ensure that all team members understand what is required, and making clear distinctions between which individuals are and are not allowed access to client and firm data. Advisors must also review and update their code of ethics at least once annually, or when there are material changes in the firm’s structure or operations.

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Code of Ethics Requirements for CFP® Professionals

While not written into any federal or state law, Certified Financial Planner™ professionals are expected to adhere to the ethical standards set by the CFP Board.

The CFP Board Code of Ethics and Standards of Conduct requires advisors to do the following:

Act as fiduciaries when providing financial advice to clients, fulfilling duties of loyalty, care and compliance with reasonable and lawful client instructions
Perform their professional services with integrity, competence and diligence
Prevent conflicts of interest whenever possible. When a material conflict exists, clearly explain it to the client, secure their informed consent and take steps to keep it from compromising your advice.
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
Avoid borrowing from or lending money to clients, except when the client is a family member or the lender is a business that lends money
Never commingle client assets with personal or firm assets

Failing to follow this code of ethics may trigger penalties ranging from public censure to permanent revocation of your CFP® marks. Losing your certification could also cost you existing clients or new business if your reputation and brand are damaged as a result of an ethical violation.

Code of Ethics for Other Financial Advisors

Broker-dealer advisors must follow Reg BI ethics rules when acting on behalf of clients. This rule requires advisors to disclose all material facts about the client relationship using Form CRS, exercise a duty of care when making investment recommendations, avoid and disclose conflicts of interest and establish written compliance policies to ensure that everyone within the firm follows Reg BI standards.

If an advisor is dual-registered as both an RIA and a broker-dealer, the ethical standard they’re held to depends on which hat they’re wearing when serving clients. When acting in an investment advisor capacity, the fiduciary standard applies; when acting as a broker-dealer, Reg BI applies. Dual-registered advisors must be very clear about which standard to use and when to avoid operational and ethical conflicts.

Advisors may also be subject to codes of ethics at an organizational level. Members of the National Association of Insurance and Financial Advisors (NAIFA), for example, 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. These rules may or may not impose a fiduciary responsibility.

How to Create an RIA Code of Ethics

Advisors discussing what to include in a code of ethics.

Registered advisors must follow SEC rules for drafting a code of ethics. Here are some common tips to help you create one for your firm.

Supervised and Access Persons

At the outset, your code of ethics should include wording that specifies who it pertains to and what purpose it’s intended to serve. Those covered by a code of ethics include access persons 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
Anyone who delivers investment advice for the advisory firm under its supervision

An access person is categories of supervised persons with non-public access to client trade information. This subset may include analysts or support staff. Clearly identify which label (access or supervised) applies to each person the policy covers.

Standards of Conduct

Under standards of conduct, you’ll explain the responsibilities of supervised and access persons, and the professional standards they’re expected to meet under the fiduciary standard. In addition to detailing how each group of persons 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.

Detail policies for the handling of confidential client information and 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.

Personal Securities Reporting

Include reporting procedures for access persons’ securities holdings and trades in your code. Access persons generally must submit an initial holdings report within 10 days of assuming that status, followed by reports at least once every 12 months. Quarterly transaction reports are generally required within 30 days of quarter-end. Outline what each report must contain and when reporting exceptions apply.

Compliance

The final sections of your ethics code should cover compliance requirements, including compliance certification and consequences for failure to comply. You’ll also specify reporting rules and what’s required when a violation occurs. 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. If you don’t have a CCO on staff yet or you’re filling the role yourself, you might consider outsourcing CCO duties to save time.

Frequently Asked Questions

Do Financial Advisors Have to Disclose or Publish Their Code of Ethics?

SEC-registered investment advisers must briefly describe their code of ethics in Item 11.A of their Form ADV Part 2A brochure and explain that clients and prospective clients can request a copy. They must provide the code upon request, but these SEC requirements do not mandate publishing the full document on the firm’s website. State-registered advisers should check their state’s applicable requirements.

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:

How Often Should an Advisor Update Their Code of Ethics?

SEC-registered investment advisors must review their compliance policies and procedures at least annually, including assessing whether their code of ethics needs changes. Updates should reflect identified gaps, regulatory developments and changes in the firm’s activities. Significant developments may warrant an interim review rather than waiting for the next annual assessment.

Bottom Line

A financial advisor reviewing the code of ethics for her firm.

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.

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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.