Wednesday, 12 March 2008

The Integrity of Financial Services Professionals in Canada, the UK and the USA

The results of the mini survey are in and evidently readers of this blog don't think highly (we Canadians are prone to under-statement!) of the integrity of financial services professionals in Canada. With 28% giving a fat zero out of five, more than the total of 27% who gave 3 or better, it would seem that the industry has a lot of improvement to make. Mind you, folk who DIY their finances may be somewhat more antagonistic to the industry than most people.

I had promised to show the results of surveys done of the financial services industry rating itself, so here goes. The source of the surveys is the CFA Institute, which manages and awards the Chartered Financial Analyst designation and whose About US includes this statement: "We promote the highest ethical standards..." What is interesting and useful is that the CFA Institute conducted the same survey in the three countries of Canada, the UK and the USA giving real comparative data. The complete surveys, all dated May 2007, are available for download in their Publications page.

What do the surveys say? You will likely not be surprised to learn that these folks rating their own industry think they are doing ok - on a scale of 1 (lowest) to 5, the ratings for all three countries are generally in the 3-4 range. But there are some amusingly revealing quotes ... from the US survey "... sell-side analysts themselves thought more of their ethical behavior than did survey respondents who were not sell-side analysts." Perhaps also not so surprising, hedge funds and private equity everywhere do a lot less well than the industry as a whole - from the UK survey, "Mirroring the concerns of other markets, individuals show the least confidence in ethical integrity of hedge fund and private equity practitioners." Their rating is everywhere in the 2s - below the adequate level. And remember, this is from people who are less likely to slam them.

In both Canada and the USA, people working inside the country thought less well of their ethics than those outside. Is this modesty? Or do outsiders not see the dirt? In the UK, it's the opposite - insiders think better of themselves than outsiders. Maybe they are right since the UK scores better across every sub-category of the survey, whether its themselves or outsiders doing the rating. The UK gets the silver medal (no one gets above 4 so no one deserves gold)! Canada gets bronze by a hair and the USA is out of the medals. The USA is let down by its people ratings - those hedge fund managers, corporate boards and corporate executives.

Choice quotes from the surveys:
Overall, compensation is prime motive for money managers as opposed to client interest. Some managers are more ethical than others.” — Sell-Side Analyst (Canada)

Hedge funds and private equity are so different—your question cannot be answered.” — Plan Sponsor (Canada)

Fiduciary duty is required. Fee disclosure needs to be mandatory. Education gap in financial planning’ sector needs to be addressed.” — Investment Consultant (Canada)

It seems like that in most firms, ethics are not a focus. This is especially true when ethics are at odds with firm profits.” — Investment Consultant (USA)

I believe most market participants have high ethical qualities, but some aspects of, and participants in, the industry do not always work in their clients’ best interest.” — Financial Advisor/Wealth Manager (under "Positive Comments" in the US survey)

Ethics, like charity, begins at home. The CFA has a fine looking Code of Ethics and Standards of Conduct, which includes sanctions for violations up to the loss of the CFA designation. I wonder how many disciplinary actions have been imposed lately.


Anonymous said...

I think the idea of a financial advisor being a "professional" like a doctor etc is a complete and utter joke.

There is nothing wrong with selling on commission but call a spade a spade so that investors know what's going on.

CanadianInvestor said...

FourP, You are right, there's nothing ethically wrong per se with selling. The problem is outright lies, or more subtly, failure to properly inform people about negatives. A good doctor always tells you if the operation might kill you and what the chances are that will happen. So should ethical salespeople.

In my opinion, there should be a place in the financial services industry for advisors who are both knowledgeable and unbiased in the way a doctor is. Just as you are not questioning whether the advice to have an operation is because the doctor makes more money if you do, so should you not ask the same question about buying life insurance, an annuity, or an investment fund.

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