Library/CFA (Chartered Financial Analyst)/SchweserNotes™ 2022 Level I CFA® Book 5: Portfolio Management and Ethical and Professional Standards/Reading 56: Ethics and Trust in the Investment Profession

Reading 56: Ethics and Trust in the Investment Profession

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Ethics, Professions, and Trust5 min

Ethics consists of shared beliefs regarding good or acceptable behavior. Ethical conduct balances self-interest with the impact on stakeholders—individuals or groups directly or indirectly affected by an action, such as clients, coworkers, and the profession itself. A code of ethics is a written set of moral principles guiding behavior and communicating values. A profession is a group with specialized skills and knowledge that serves others and agrees to behave according to a code of ethics. Professions establish trust by requiring high standards of expertise, establishing ethical standards, monitoring conduct, encouraging continuing education, focusing on client needs, and mentoring others.

Key Points

Ethics balances self-interest with the impact on stakeholders.
A code of ethics communicates values and guides acceptable behavior.
Professions differ from general occupations by requiring specialized knowledge and adherence to ethical codes.
Trust is established through high standards, monitoring, and a client-focused approach.

Ethics in Investment Management5 min

Investment professionals are entrusted with client wealth, creating a special responsibility to protect and grow assets. Because investment management is an intangible product, trust is paramount. Unethical behavior can damage client wealth, impede firm success, and negatively impact society by reducing available capital and increasing the cost of raising capital. Misallocation of capital due to unethical behavior stunts economic growth. Professionals may be held to a suitability standard (matching recommendations to client needs) or a fiduciary standard (acting in the client's best interest).

Key Points

Investment services are intangible, making trust essential.
Unethical behavior increases the cost of capital and leads to misallocation of resources.
A suitability standard requires matching risk/return profiles to client needs.
A fiduciary standard requires acting in the best interests of the client.

Challenges to Ethical Behavior and the Law5 min

Individuals often overrate their own ethical character. Situational influences, such as social pressure, loyalty to an employer, or financial incentives, are often stronger determinants of behavior than personal traits. Strict rules-based compliance cultures may inadvertently discourage ethical deliberation by focusing on what one 'can' do rather than what one 'should' do. Furthermore, ethics and law are not synonymous. Some illegal acts, like civil disobedience, may be ethical, while some legal acts may be unethical. Ethical principles often demand a higher standard of judgment than laws, which are frequently reactive to past scandals.

Key Points

Situational influences often override personal ethical traits.
Strict compliance rules can stifle ethical judgment.
Legal actions are not always ethical, and ethical actions are not always legal.
Laws are often reactive, following financial crises or scandals.

Ethical Decision-Making Framework5 min

Integrating ethics into decision-making allows for the consideration of alternative actions and long-term consequences. The Level I CFA curriculum presents a framework: (1) Identify relevant facts, stakeholders, duties, principles, and conflicts; (2) Consider situational influences, additional guidance, and alternative actions; (3) Decide and act; and (4) Reflect on whether the outcome was anticipated. This process helps identify issues, examine them from multiple perspectives, and avoid unintended consequences.

Key Points

Framework Step 1: Identify facts, stakeholders, duties, and conflicts.
Framework Step 2: Consider situational influences and seek outside guidance.
Framework Step 3: Decide and act.
Framework Step 4: Reflect on the outcome.

Questions

Question 1

Which of the following best defines ethics in the context of professional behavior?

Reading 56: Ethics and Trust in the Investment Profession

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