We all know about compliance—adhering to the rules and regulations set up to protect people who buy financial products.

When a client’s well-being and retirement are at stake (not to mention the major legal risks of non-compliance for the company), it only makes sense to pay close attention to these safeguards. That’s why financial companies have well-staffed compliance departments.

But beyond compliance lies a gray area of client protection: ethics.

Most companies don’t have an ethics department, and what ethical guidance there is for sales is often vague or subjective. How should companies set ethical guidelines, and how should their employees interpret them?

Trust Factor

Why bother to have an ethical standard in the first place?

“Ethics is important for both the present and future of our business,” says Head of Annuities Chad Burns. “Our business is based upon trust and a promise. Unethical activities diminish that trust, and the reputation of our company and industry.”

Unethical behavior may make the company a few extra dollars in the short term, but in the long term, a bad reputation translates to less business and worse client relationships. Clients don’t just want to know that you’re doing the bare minimum required by the law; they want to know that you have their best interests at heart. Strong ethical standards build trust, and clients who trust their advisor are much more likely to bring them more business.

Think of ethical standards as protection for your most precious asset: your client relationships.

“As a carrier, we need to recognize that our insurance solution may be only one of many components that the producer has sold to their client to create a complete financial plan,” says Burns. “If we don’t hold ourselves to the highest of ethical standards, and we damage the relationship between the producer and their client, the producer is at risk of losing the entire financial plan and portfolio—not to mention the client.”

Two Ethical Standards

There are two main ethical standards recognized across the industry: the suitability standard, and the more stringent fiduciary standard.

Suitability requires the salesperson to offer a product that meets the client’s needs, not what’s objectively best for the client.

Nick Argol, Director of Training and Product at Aspida, compares suitability to buying a suit.

“Imagine you’re going out on a first date with someone you want to impress, but you’re colorblind. I’m a salesperson who happens to have a collection of purple suits with red piping, and since you’ve only asked for a suit that fits you well, I say, ‘Hey, this one’s perfect.’ As a matter of fact, it fits you well but you look like a clown. This counts as a suitable transaction, because you need a suit that fits.”

By contrast, the fiduciary standard requires much more than simply providing what the client asked for. It wouldn’t be enough to offer a well-fitting suit; you would have to offer the best looking, best fitting suit in the store’s inventory.

The fiduciary standard, says Argol, “really comes down to the effort the advisor exerts to make that recommendation to the customer. If a customer came in looking for a product that met a few particular needs, the fiduciary’s response would be ‘Why?’ and ‘What do you expect?’ and ‘What’s the degree of effectiveness?’ and ‘What other resources do you have?’ It would be a complete financial examination of the individual, and the fiduciary would find the absolute best solution that they believe is available to fit the need of that customer.”

Live by the Golden Rule

For some companies, neither the suitability standard nor the fiduciary standard fits. Instead, they offer an ethics policy based more on a particular philosophy. They follow the ancient Golden Rule: Do unto others as you would have them do unto you.

“Every client relationship should be treated as if the agent was the policy holder,” says Burns. “What would you want to know, and how would you want to be treated?”

Having a Golden Rule ethical code effectively translates to a very high suitability standard.

Just as that suit seller should think about what it would feel like to be sold an ugly suit, those who sell financial products should think about what it would feel like to be sold a product that isn’t right for them.

This is a significantly easier job in the insurance and annuities industry, whose products don’t have the downside risk of investments. Even so, it’s vital to choose the right product for each client.

Gold Standard for Ethical Guidelines

The point is, producers should act in the best interests of every one of their clients—as if they were all ‘their best client,’” says Burns.

“I’ve often heard producers say, ‘I sell your product to my best clients.” In turn, being able to put yourself in your clients’ shoes, so to speak, is a good exercise. “Producers should think about whether the sale they are making would be applicable for their parents, spouse, and children, given the same type of circumstances and solution,” he adds.

Disclose, Disclose, Disclose

Perhaps the best ethical guideline for advisors is to offer “full disclosure to the customer as to who they are, what they’re doing, what the expectations are, and then to enter into a contract to deliver those services,” says Argol.

The client should know whether the advisor is using the suitability standard or the fiduciary standard, and they should know what the advisor can and cannot do. If a particular matter requires an attorney and the advisor isn’t one, for example, they should disclose that fact and refer the client to an attorney. The more openness and clarity, the more trust in the advising relationship.

In the insurance industry in particular, it’s also essential to disclose as much information as possible about the product being offered, in order to ensure that the contract is being entered into in good faith.

“Each party is entitled to rely in good faith upon the representations of the other,” note Skipper and Black in their foundational textbook Life & Health Insurance, “and each is under an obligation not to attempt to deceive or withhold material information from the other.”

Without good faith disclosures, neither the insurer nor the insured can trust each other, and the insurance industry ceases to function.

Choose Your Ethics

Every company decides on its own ethical standards, and then enforces them across all levels. But several certifying organizations offer their own codes of ethics, and these can be a useful set of ethical guidelines, both for members of those organizations and for other companies or groups looking to establish standards.

The best known of these is the Code of Ethics and Standards of Conduct created by the CFP Board to govern Certified Financial Planners. The Board expects everyone with the CFP designation to adhere to these high standards, which include:

  • Acting with honesty, integrity, competence and diligence. This includes avoiding any fraud or lying.
  • Acting in the best interest of the client. Since 2007, this includes being a true fiduciary.
  • Avoiding all conflicts of interest (or at least disclosing those conflicts fully).
  • Maintaining client privacy and confidentiality.
  • Providing accurate information to the client at all times, so that they can make informed decisions.
  • Disclosing any fees, commissions or other costs to the client up front.

Summing up

It may be useful to think of ethics less as an aspect of compliance than as an aspect of public relations and marketing. A company’s good reputation is more valuable than any number of clever television ads or paid spokesmen.

Being known to your clients as an honest broker who treats them as you would like to be treated is the foundation of the long-term relationships necessary for success.

A strong ethical grounding, from the lowest-level employees to the highest, can make or break your business.

“We see in the headlines all of the time —unfortunately—what happens when ethical standards aren’t maintained,” says Burns. “It only takes one bad experience, and then that person tells two people, they tell two people, and so on. One incident can quickly multiply.  We are only as good as our reputation and adhering to strong principals and ethics is one way to maintain both our integrity and reputation.”