ETHICAL ISSUES

ETHICAL ISSUES (Part 1)

Definition of Ethics: Ethics can be defined as several moral principles that decide and influence a person’s behaviour, dealing with what is good for society and individuals.
Importance of Ethics: Ethics goes beyond legal requirements, focusing on what is right or wrong behaviour, arising from basic values and character.
Key Principles: Widely acknowledged fundamental ethical principles include honesty, fairness, diligence, care, and respect for others.

Business Purpose: Business has various reasons for existence, including making profits, but it must also consider the bigger picture and operate with ethical principles.
Client First Principle: Investment advisers must prioritize the client's interest above their own, ensuring no conflict of interest and maintaining trust.
Trust and Confidence: Building trust takes time but can be lost quickly; investment advisers must ensure their actions demonstrate ethical standards.

Role of Financial Intermediary: Financial intermediaries channel domestic savings into investment vehicles, helping issuers and investors, and must prioritize the client's needs.
Common Problems: Investor grievances often stem from advisors' lack of focus on client needs, understanding of financial products, and overall market knowledge.
Wrong Practices: Advisors must avoid practices like churning (frequent switching for commissions) and misrepresentation (highlighting only good features of products).

Definition: An ethical dilemma is a situation where a decision must be made between two alternatives, neither of which is superior, reflecting the person's moral beliefs and principles.
Categories: Ethical dilemmas can be pure (where both alternatives violate ethics) or involve clashes between personal and professional values.
Resolution: Resolving ethical dilemmas sends signals about an investment adviser's ethical standards, reinforcing client perceptions and impacting their reputation.

Definition: Ethical issues in investment advising refer to the moral principles that guide the behavior of investment advisers in their interactions with clients.
Details: These issues arise when there are conflicts of interest, and the adviser must prioritize the client's interests over their own.

Deeper Analysis: A thorough examination of the situation to determine the best course of action.
Principles: Guiding principles, such as doing the highest amount of good for all parties involved or minimizing harm, can help resolve ethical dilemmas.
Reconsideration: Approaching the problem from a different perspective can lead to alternative solutions.

Definition: Investment advisers have a fiduciary duty to act in the best interests of their clients.
Details: This duty requires advisers to prioritize their clients' interests, avoid conflicts of interest, and provide full disclosure of all relevant information.

Full Disclosure: Advisers must provide complete and accurate information to their clients.
Suitable Advice: Advisers must provide advice that is tailored to the client's specific needs and circumstances.
Reasonable Basis: Advisers must have a reasonable basis for their recommendations, which should not be influenced by personal gain.

Do's:
- Deal only with SEBI-registered investment advisers.
- Check for SEBI registration numbers.
- Pay advisory fees through banking channels.
- Ask for risk profiling before accepting investment advice.
Don'ts:
- Don't deal with unregistered entities.
- Don't fall for stock tips or guaranteed returns.
- Don't give money to investment advisers for investment.
- Don't rush into investments that don't match your risk-taking appetite.

Securities and Exchange Commission (SEC) US: Requires registered advisers to disclose information about their financial condition and disciplinary events.
Code of Ethics: Advisers must adopt and enforce a written code of ethics that reflects their fiduciary duties to clients.
Australian Guidelines: Advisers must act with competence, honesty, integrity, and fairness, and satisfy the best interests standard.

Best Interests Duty: When providing advice, a financial adviser must act in the best interests of the client, considering their relevant circumstances and only recommending financial products that are suitable for them.
Reasonable Advice: The adviser should ensure that any advice provided is reasonable and based on a thorough investigation of the most appropriate products relevant to the client's circumstances.
Client-Centric Approach: The financial adviser must:
- Base all judgements on the client's relevant circumstances
- Take any other step that would reasonably be regarded as being in the best interests of the client
- Provide advice that is free from conflicts of interest and prioritizes the client's needs
Regulatory Framework: The Corporations Act 2001 (s961B) outlines the obligations of financial advisers to act in the best interests of their clients, as seen in the Australian Securities and Investments Commission (ASIC) guidelines.