SITUATIONAL ETHICS AND SITUATIONAL MORALITY: (1998) Milton Friedman said that "there is only one and only one social responsibility of business- to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game.. and engages in open and free competition without deception or fraud." Long time reader already know of my feelings about ethics in the financial planning, securities and insurance industries. Some feel that my rhetoric is a little extreme. But here is someone else who has the same ethical overtones- Marine Commandant Gen Krulak. His comments from Scripps Howard News Service.
"Everyone is entitled to make some mistakes and to be forgiven, except where moral turpitude is involved". That includes "lying, cheating and stealing". His high concepts of what is right, he contends, is that "sort of rock solid moral underpinning that must be standard underpinning..... for the future." While his comments are addressed to the moral fiber of the Marines, he is attempting to build better men that "must bear a moral compass that will guide them to the right decisions in even the most chaotic circumstance". Those ideals would seem to reflect the need in society overall. He also hopes to re-stitch what he believes is America's tattered moral fiber. Drill instructors now also hammer home lessons of integrity, respect and self sacrifice.
I ask you all, what is wrong with that? Isn't that what you want your children to stand for?
MAJOR WIREHOUSE FRAUD: (1998) Direct quote from a broker. "I work at a major wirehouse(ten year veteran) and when I was told that once again I needed to complete my continuing education for my insurance license I was given a few forms to fill out and a test AND all the answers. I was informed in writing that I should miss at least two or three answers on each section of the test and to state that it took me 30 to 90 minutes to complete each sections. I did all the above, turned in the forms and exam. I'm no different from anyone else- I consider this continuing education thing for insurance to be a major annoyance....But I'm beginning to feel a little guilty. I think the state insurance board would find it interesting that in a large branch office of a major wirehouse that the brokers are being helped to cheat on this educational requirement."
Virtueless: (US NEWS 2001) About half of college students admit to cheating. Where does that come from- high school. 75% of HS schools students admit to cheating on a test in the last year. Where did that come from? "Students cite famous cheaters as examples of what it takes to succeed. This world is full of cheaters because cheaters are the ones who most often get to the top. Top cheater names in the past have been Michael Milken and Donald Trump. More recently, "If Clinton can do it and get away with it, why can't we".
Letter to Jane Bryant Quinn, August 2001, RE: Commissions versus fees and Trust
I recognize the issue of the high price of commissions (98% of everything I have done for the past 12 years has been for a fee) and have consistently warned the public about the ineptness of most people in the securities, planning and insurance industries (they are NOT professions) regardless of type of compensation. I have also tried to force the various planning entities to enforce ethics. Certainly requiring that one act legally. No success. And the major reason that such unethical activity continues to exist is that you- and almost all other journalists- have done a tremendous disservice to the public through an intentional deception that the organizations enforce ethics or that the officers and directors of these organizations are actually legal themselves. You know full well that your statement "they don't want anything to smell" has been nothing more than a perfumed coverup by the media so that the increasing numbers of unlicenced fee planners may continue to practice illegally and unethically in their respective states (32 at last count).
As partial proof, I am the only remaining CFP in the entire state of California who is legal to practice fee planning. There are no NAPFA nor CPA PFS members nor any officer or director of same nor of the Board of Standards, the FPA association nor literally any other organization in this state that are legal in the offering of comprehensive fee planning. (Actually, none of the B/D firms are legal either.) And never have been. Same with Worth's best planners. Further, Worth has been aware that many of their choices have been actively violating state law for years (journalistic integrity??). But I am at a total loss why you have refused to illustrate this illegal activity- one in which you must have been aware of for at least the better part of ten years. That is a grueling slap at the few of us who attempt to foster ethics, knowledge and integrity so that consumers know the truth- yet you belittle this attempt on an ongoing basis through an effective validation of the majority who act with contempt to the issues of integrity and trust. Why?????? Isn't it a "conflict of interest" to offer or propose to offer services where one is unlicenced, unethical and illegal?
You say that fee only planners favor a change to the acknowledgment of fees and commissions. I'll give you a little leeway but in reality a fee planner cannot charge for anything. They must be registered as an Registered Investment Adviser with the state or SEC- and that only includes investments. The other is whether they are licensed to address the most convoluted issue of planning- insurance- which is an integral part of risk management, retirement, estate planning and more if for the simple reason that most clients have already owned a policy (or two or three or four.......), they have trusts, the policies are not acting as initially illustrated, etc. They cannot charge a fee for any of this work unless they are licensed in the 32 states as mandated by law - and literally none of them are no matter what their affiliation. Further, everyone knows that all these planners pick up the policies and "review' them. But even that is imbued with uselessness since the spokesperson for the FPA said recently that planners (and their choice is the CFP) "do not have to know the ins and outs of an insurance policy". Well, if not a planner, them who??? If the suggestion is to simply refer them over to a commissinable agent, what has been gained? It's the blind leading the blind. Secondly, charging a fee for "independent" work only to have the client then be charged a commission because the fee planner is incompetent belies almost the entire use of a fee planner in the first place (and nobody ever addresses that.) The fee planners supposedly escape the tainting of a commission only to require the client be charged a commission anyway (LTC for example is only sold by a commission. Does that make it wrong??)
The reason insurance still gets a bad name is, in truth, the lack of knowledge and extreme commissionable bent of the agents and the focus by the insurance companies to sell as much product as possible under the guise of "need". The fault is additionally compounded by the rest of the industry that is NOT licensed in any capacity, acts illegality, violates all ethical standards- yet goes out and performs incompetent analysis of the issue or skips it altogether. No one is really making anything much better due to this commissinable element or just plain gross ineptness and refusal to become knowledgeable.
But you and other journalists NEVER address this fact, the illegality, violations of ethical standards and a breach of the fiduciary duty. This sure "smells" to me and, I bet, it would smell to all consumers were they to find out their planners are acting illegally. I have no hesitation to state that if a planner is lying about their licensing, is lying about their legality, is lying about their ethics and is lying about their integrity, it's just a matter of time before they will lie about their clients money.
The consumers have always perceived that a CFP (and others) are legal in offering to perform all the functions of planning where in fact illegal and unethical activity is condoned by the Board (see how many officers and directors are legal). Additionally, as stated by the Board- "we will not enforce an ethical violation unless preceded by a legal one". That's not ethics. Ethics starts where the law leaves off.. Anyone who has ever looked at the violations addressed by the Board can clearly see that almost any entity falling into disfavor with the Board has already been convicted by a Federal or State court, the SEC, and arbitration, etc.. You also must know that- why have you not told consumers that the ethics that is being portrayed is effectively for show, not compliance.
Let's address two more issues of insurance. Most people can just use term insurance that reflects needs over a defined period. But let's say there is an individual who needs lifetime coverage. What product fits this need without a lot of extra fees and where the policy is basically "what you see is what you get". A no load product? Sorry- that is little better than a straight commissionable product. It's called a no lapse. The implication is that fee only planners would recommend this. Not a chance. They wouldn't have a clue since it is a commissionable product. (Actually, hardly any licensed agent would know of it either.) So how do you figure this out? Am I to charge a fee? Then refer to someone else who has no idea what it represents and have them get the commission? Is it my responsibility to teach the agent? Do I charge the client extra for this?
And what about long term care coverage? They are ONLY available by commission. Same scenario as above. Why would a unlicenced fee planner- who is trying to indicate both knowledge and impartiality to his/her work- have any significant idea of the policies without a license. California has a mandatory 8 hour class each two years in LTC (which I have taught for years). How does the consumer get the best deal here? Paying a fee to an unlicenced planner who has never taken the mandatory instruction of the issue of LTC but nonetheless charges a fee? And then turns the purchase over to a "regular" agent who is mandated to indicate the commission? Even if the consumer did proceed, he/she has got hit with two charges for the same product? Is this legal? Yes. Is it ethical? I submit not. Does it reflect integrity and the best interests to the consumer? Not even close.
Yes, the issue of commissions should be addressed. But the public has a right to know that the bulk of other planners have breached their fiduciary duty which is, at least in my mind, a violation of trust equally as bad as a commission. Further that the organizations they have relied upon in presenting ethical and legal planners is, in fact, a fraud. But such fraud and illegal activity has been acknowledged by journalists as inconsequential and, obviously, acceptable. Perhaps so, but they- and you- do not then have the right to lecture about elements of "trust or ethics " since you have violated the same precept.
To paraphrase from another, the continued refusal to tell the truth to the consumer when it is well known, "... is the most successful journalistic scam I have seen in my entire adult lifetime. A catastrophic fraud. Corrupt, intellectually bankrupt and revolting." I think your readers are deserving of more.
Trust: (2002) In a survey of 363 retirement plan investors conducted by PR firm TowersGroup , more than half of the respondents rated insurance salespeople near or at the bottom of a 1-to-5 scale in honesty and integrity. Meanwhile, 36% gave bottom-dwelling scores of 1 or 2 to stockbrokers and corporate management, while nearly as many claimed board directors were untrustworthy.
Meanwhile, bankers, mutual fund companies and financial planners received high scores from investors, respectively getting 4 or 5 from 39%, 38% and 34% of respondents grading those groups of professionals.
According to the study, investor trust has drastically degenerated in the past few months. More than 40% have less confidence in the stock market, and only 23% believe strongly in the market's ability to reflect fair value. However, despite the "Enron Valdez" debacle, 70% of respondents are comfortable with the amount of company stock in their plans, and 9% would like to own more.
Professionalism (Tom Campbell 2002) "The diminishing concept of a profession is at the heart of the most recent business scandals....... For centuries, even with free market economies, we have recognized that the role of the professional is to provide expert advice. Confidence was placed in the professional because he or she had no ulterior motive.
The regulatory regimes we have set in place over the years are, perversely, partially responsible for this. By outlawing some forms of self dealing, our laws give a phony sense of security that the system is being patrolled. And the actor within the system, similarly, the one formerly called a "professional" is given a new meaning of professional ethics. It's whatever the law does not forbid.
No amount of new laws governing behavior with solve this fundamental problem. Cleverness married with self interest will always outstrip the imagination of lawmakers and regulators. The response rather should,d be to return a system of professionals who perform their service. Those who go outside the limits of their profession would be removed- not for specific wrong doing; but for destroying the fundamentals basis on which trust for the profession is premised.
Where there is a role for the professional, however, keep the incentives clean. This is the first principle of ethics in a free market economy."
Nice words- and means nothing in my profession. The CFP Board of STandards calls out for adherence to their ethical standards while the officers and directors are in direct violation of the law. The officers for the FPA do the same thing and NAPFA has pursued illegal financial planning since its inception and yet says it promotes the highest fiduciary duty.
In the book I am writing, I intend to, once again, expose this absolute violation of the consumers trust. It's not simply ethics, it's the law. It envelopes what a profession is supposed to be and what these organizations have allowed it to become- a sham. I have stated repeatedly, if a planner lies about their licensing, life about their ethics, lie about their integrity- it's just a matter of time before they will lie about your money.
Trust by John Melchinger (2002) - "Trust" is the answer most practitioners give when asked, "Why do your clients, centers and prospects do business with you?" Trust is a good answer, but woefully incomplete if you do not know its nature or how to develop it.
By definition, trust is a firm belief in the honesty, reliability, credibility and integrity of someone. It implies that the person trusted has a duty of care or custody to the one who trusts. The buyer who trusts puts faith in the advisor to act in the buyer's best interests, to be what the advisor claims s/he is, and to be giving competent advice. Trusting an advisor means putting stock in that person's advice. Trust is an action demonstrating faith in another.
Fiduciary Responsibility: Fiduciary Breach Cases Against Retirement Plan Trustees Rising
Industry executives say retirement plan trustees at many companies are ill-equipped for their jobs as fiduciaries, either on account of potential conflicts of interest or ignorance about their responsibilities. Pension law doesn't require trustees to monitor the plans every day or even to have any investment expertise. Many trustees don't have financial backgrounds; at large companies, they are often midlevel human-resources executives, while at smaller outfits, they can be anything from a president of a construction company to the head doctor at a family practice.
Imagine- no investment experience. Just a lot of arrogance and ego thinking they can do the job. I repeat, if you do not know diversification by the numbers, you know nothing about investing. It all starts with the fundamentals.
Ethical lapses (AP 2002) And yet we have lapses by Enron, Worldcom, tyco, Knight Trading Company, Adelphia Communications and a host of many more have had serious executive missteps. The Chairman of Goldman Sachs noted that "in my lifetimes, American business has never been under such scrutiny . To be blunt, much of it is deserved."
But the NY Times noted, "Six months after the collapse of Enron, the wave of enthusiasm for overhauling the corporate and accounting laws has ebbed and the toughest proposals for change have been thwarted." It may not go back to the status quo of the past, but it probably will be very close to "busines as ususal" in about a year or so.:
Integrity (Professor Howell in CFO magazine 2002), "Auditors who fail to protect the public trust and who benefit from the profits of consulting services, and analysts who support, inappropriately, their firms investment banking clients are nothing more than shills. Leaders stand up to be counted. They can differentiate, quickly, between right and wrong and say so."
Ethics (US News 2002) 97 percent of students said their college studies had prepared them to behave ethically in their future work lives. But 73 percent of the students said that when their professors taught about ethical issues, the usual message was that uniform standards of right and wrong don't exist ("what is right and wrong depends on differences in individual values and cultural diversity"). It's not news that today's campuses are drenched in moral relativism. But we are allowed to be surprised that college students report they are being well prepared ethically by teachers who tell them, in effect, that there are no real ethical standards, so anything goes.
. Several years ago, a college professor in upstate New York reported that 10 percent to 20 percent of his students could not bring themselves to criticize the Nazi extermination of Europe's Jews. Some students expressed personal distaste for what the Nazis did. But they were not willing to say that the Nazis were wrong, since no culture can be judged from the outside and no individual can challenge the moral worldview of another.
Since "truth" is an act of community empowerment, truth is whatever the tribe or the individual says it is. This is why debate and argument have disappeared from the modern campus–to criticize anyone's ideas is a personal assault, like attacking someone for liking chocolate ice cream. This notion that disagreement is an assault helps explain the venomous treatment of dissenters on campus–canceled speakers, stolen newspapers, ripped-down posters, implausible violations of hate-speech rules, and many other hallmarks of the modern campus.
If students leave college convinced that ethical standards are simply a matter of individual choice, they are less likely to be reliably ethical in their subsequent careers. This seems like understatement. The nation is currently outraged about the moral shenanigans of the tycoon class, but it's hard to see how things will improve if we teach the next generation that standards don't exist and moral debate is a personal violation and a sham."
Just what I face consistently in my business all the time. Rationalize anything you want as long as it is in your best interests.
Ethics (NY Times 2002) "But in the end, experts in law, ethics and psychology say, the public's thirst for justice will simply not be sated at the courthouse. The arrest and punishment of a handful — or even a score or two — of executives will do nothing to counter what these experts see as the true challenge facing corporate America: to persuade a doubtful public that there is integrity in executive suites."
Ethics is not inherent in the planning, securities or insurance industries. There has been- and is- a direct breach of fiduciary obligation to consumers since these same entities are acting illegally.
Ethics: (NY Times 2003) Since unethical behavior can take many forms in business, it's impossible to contemplate a law or regulation that would keep every bad move in check.
Too often, when regulations become the guiding factor, two things happen. First, corporate leaders focus on meeting the regulations rather than trying to understand the purpose of them. And second, an inordinate amount of time is spent trying to navigate around the regulations without actually violating them. Nowhere is this clearer than when a new spate of tax laws are introduced and the result is a plethora of activity among tax professionals to find loopholes for their clients.
If there is a lesson to be learned from the high-profile corporate scandals, it's that corporate behavior stems directly from the example set by the leaders at the top of organizations. The antidotes to corporate malfeasance then are not new laws and regulations, but putting corporate leaders in place who have shown they are capable of doing the right thing and then holding them accountable.
If we're looking for fixes in corporate America to restore the public's faith, we should ensure that the leaders put in place are those we know are of the highest integrity, whether it's to lead the S.E.C. or any American company.
Ethics (NY Times 2003) "But in the end, experts in law, ethics and psychology say, the public's thirst for justice will simply not be sated at the courthouse. The arrest and punishment of a handful — or even a score or two — of executives will do nothing to counter what these experts see as the true challenge facing corporate America: to persuade a doubtful public that there is integrity in executive suites."
Ethics is not inherent in the planning, securities or insurance industries. There has been- and is- a direct breach of fiduciary obligation to consumers since these same entities are acting illegally.
Ethics (CFO, Seglin-2003) The trouble with demanding ethical behavior is that unless those doing the demanding heed their own words, the call rings hollow. In fact, it's likely to do more damage than good if you are going to proclaim such behavior but practice otherwise. Many companies installed well crafted codes of ethics- respect, integrity, communications and excellence. The catch is, in order to work, these value statements must reflect the reality within the company.
Greed is not good
Getting clear is not all that easy. Although the word ethics gets tossed around freely, those doing the tossing often aren't entirely clear what they mean by it.
Basically, ethical standards are built on a set of morals that define good and bad behavior. Almost everyone can agree that some actions- murder for example- are wrong. Other behaviors- bluffing during negotiations- are open to debate. But generally speaking, behaving ethically means avoiding lying, cheating, and stealing, as well as cruelty, deception and subterfuge.
It's not enough to fall back on "if everyone is doing it, it's O.K.
And just because an action is legal does not automatically make it ethical. What ethical decision- making difficult is that it requires thinking through the impact of the decisions on all the constituencies effected, regardless of whether the law permits it and despite the negative or possible personal consequences.
Misplaced Loyalty
Loyalty, a noble value in many cases, can also cloud an employee's clarity about doing the right think. Rather than confront a colleague on unethical or even illegal behavior, many employees, out of loyalty to the company will remain silent out of fear that disclosure could make the joint come tumbling down
If companies truly valued integrity, employees would be empowered to shine a light on wrongdoing. Of course, when the top executives are doing wrong, it takes a particular strength to call them on it. In practice, many companies make life difficult to whistle blowers and some actively stifle dissent.
Washington is calling for a wide variety of reforms. But is is all meaningless unless companies begin to reward ethical behavior as clearly as they reward bottom line performance.
Whistleblowing (CFO 2003) More often, those who try to bring to light unethical or illegal practices by their employers are criticized, treated like outcasts, fired, or worse. "It almost always turns out badly for the whistle-blower," says the director of the Emerson Center for Business Ethics at Saint Louis University. "Often they regret it. They lose their jobs, they have family problems, or they're shunted off to the side."
It's not surprising, then, that the most common reactions of those who discover dubious employer practices are to either leave or look the other way. And while the public has continually asked, "Why didn't anybody come forward?" during the recent scandals, the fact that so few did indicates that systems designed to protect whistleblowers often don't work.
"If you go into it thinking people are going to pat you on the back, you are kidding yourself,"
"The kiss of death for a career is to get a reputation as someone who is not a team player.. "And whistle-blowers usually get labeled as troublemakers."
So why do they do it? Personal ethics and integrity are really the only incentives to come forward."
As some of you are aware, that's what I did years ago and still do today. I have been blackballed and lost hundreds of thousands of dollars that went to illegal planners.
Was it worth it? I really don't know. I do have my integrity. And I would not know 2/3rds of what I know now since I have had to work three times as hard. But the financial success would have been nice.
Fraud and integrity: 25% SAY IT IS OKAY TO DEFRAUD (2003) - Nearly one in four U.S. adults say that overstating the value of claims to insurance companies is acceptable, and more than one in 10 say they approve of submitting insurance claims for items that were not lost or damaged or for treatments that were not provided, according to a survey released by Accenture. In the survey, 66% of respondents said that people are more likely to commit insurance fraud during an economic downturn and about half the respondents said that people commit insurance fraud because they can get away with it. The Insurance Services Office estimates that the cost of fraud is about 10% of total claim payments. Results: At least 10% higher rates for everyone.
Ethics and more by Chuck Levitt (CFO magazine 2003) In a speech to financial executives he noted, "You can and should be the conscience of your companies, providing the moral, ethical, and professional grounding that our executives need. It's a big responsibility, but it's absolutely the type of leadership that the times demand."
"Beyond Enron, beyond Andersen, beyond stock options and stock-market bubbles, and even beyond bad accounting, is the absence of true leaders from the business community.
I'm talking about the kind of leadership that instinctively steps forward when it is needed. The kind that puts the public interest above corporate interest and above career advantage. I'm talking about private-sector leadership that is both influential enough to be listened to by politicians as they cook up reforms and trusted enough by the public so that when a drive for reform overreaches or otherwise hurts the very markets they are trying to save, private-sector voices will be heard and will be listened to."
"Unfortunately, this lack of leadership has also infected the ranks of financial professionals. Moving forward, we need financial executives to reclaim their role as watchdogs and guardians of the shareholders' investments.
Fraud: (2003) When you look at this page from the CFP Board of Standards about Financial Advisers, you will note something missing. They have the issue of a life insurance agent but nothing about a life insurance counselor or analyst. Yet 32 states have laws specifically requiring such a license to practice - certainly to do financial planning. This is not an oversight.
Lies and Deceit: (The Economist 2003)The settlement between a host of American regulators and ten Wall Street banks shows worse and more widespread wrongdoing than had been expected. Allegations of fraud against some of the banks will encourage investors to sue.
Ethics: (2003) A study by the Aspen Group found that 73.9 percent of respondents considered meeting customers' needs to be the No. 1 priority of a company. In second place was maximizing shareholder value, cited by 70.6 percent of those polled.
By contrast, a similar study done in February through April 2001 found that M.B.A. students considered increasing shareholder value to be a company's primary task (cited by 75 percent of respondents), ahead of meeting customer needs (71.1 percent).
Despite a perception among M.B.A. students that ethics and values are increasingly important in the workplace, only 22 percent of respondents said their schools were doing "a lot" to prepare them to handle workplace conflicts involving mismanagement or fraud.
One in five respondents did not feel they were receiving any ethics training. About half said the messages and priorities taught in M.B.A. programs might have contributed to the recent scandals.
Respondents cited a lack of investor confidence, corporate scandals and the economic downturn as, in order of priority, the biggest challenges for executives.
Women, who made up 35 percent of those surveyed, were more likely to consider it "very important" that a well-run company operate "according to its values and a strong code of ethics" (82 percent) than were men (72 percent).
Destructive Achievers: (Warren Bennis 2003) "For executive leaders, character is framed by drive, competence, and integrity. Most senior executives have the drive and competence necessary to lead. But too often organizations elevate people who lack the moral compass. I call them "destructive achievers." They are seldom evil people, but by using resources for no higher purpose than achievement of their own goals, they often diminish the enterprise. Such leaders seldom last, for the simple reason that without all three ingredients -- drive, competence, and moral compass -- it is difficult to engage others and sustain meaningful results."
I disagree with his position that such leaders do not last, at least from my position in this industry. The leaders continue to allow incompetency and unethical activity at the highest level.
Lying?: (Steven Winn 2003) He wrote an excellent commentary about lying- its America's epidemic of lying. He notes that this is a culture that has come to accept and even expect skewed information at best, outright lies at worst, in everything from government to advertising to art. We live in a society of widespread duplicity and deceit. Perhaps in our postmodern world that is increasingly comfortable with irony, ambiguity, relativism and doubt, we simply no longer believe it's possible to distinguish fiction definitively from fact, lies from truth.
In many ways, the culture confirms it by reveling in falsehood.
Seen one way, there are alarming trends. Each new revelation- whether its insider trading, the pedophelia coverup in the Roman Catholic church, the bald- faced lies of the tobacco company executives under oath or the latest case of plagiarism by some respected scholar- only confirms a cynical view that nothing can be taken as reliable or valid.
Deception is so pervasive today it almost feel authentic to us. Lies, from the skillfully subtle to the blatantly stage-managed, flow around us all the time. Many liars have their own private motives, of self interest, ambition or self destructive pathology for doing what they do.
He notes that it is important to consider the source. Whether its Matt Drudge, the latest diet, a photography exhibit, or a New York Times story, considering the source means just that- understanding the source's quality, intentions and inevitable failings as an integrated component of what it has to offer. A big part of what we know is knowing where it came from and why.
In a 1978 best seller, "Lying: Moral choice in Public and Private Life", Sissela Bok urged institutions - government, corporations, universities, law and medicine- to help banish deceit. Trust and integrity are precious resources, easily squandered, hard to regain. They can thrive only on a foundation of respect for veracity. But in a day where truth has become seriously endangered species, her faith in institutional reform seems almost quaintly distant.
Its not that people always expect or blindly tolerate lies. They simply recognize, in this disorienting day and age, how difficult it is to know anything for sure."
For those unitiated with with the "sermon", the planning, brokerage and insurance industries have practiced deceit and outright lies for years. Why has it gone on? A good part is explained above.
Ethics. (2003) The NY Times notes that "If managers take seriously the importance of ethical behavior in the workplace, they need to do a better job of letting all workers know what behavior will not be tolerated, that they will receive full support if they report misconduct, and that those guilty of misconduct will not catapult their way to the top but instead be held accountable for their actions. Such management behavior would send a clear signal to workers that being ethical in the workplace is career-enhancing — and that any alternative is unacceptable."
Ethical behavior has not existed ever in the planning business. The head of the FPA and a member of NAPFA is illegal in this state. It's a dirty little secret that they have tried to coverup for years.
Breach of fiduciary duty: (2003) small business owners may be mistakenly confident, as many report critical lapses in at least one aspect of fiduciary knowledge (legal duties and obligations relating to a qualified retirement plan). -- They don't realize that they hold primary fiduciary responsibility. A large percentage incorrectly identified the plan investment provider, the financial advisor, and even employees as having this role. -- They fail to evaluate investment selections regularly. Sixty-one percent of those with 401(k) plans reported they have an investment policy statement in place, but less than that reported having a formal process to evaluate investment selections on a regular basis. -- They do not question the ethically or risk of required funds. More than one-third consider it acceptable for a plan provider to require its funds be among a plan's investment options.
Half of all small business owners surveyed say fiduciary and legal responsibilities are a top concern and a similar number reported increased concern on the part of employees about their retirement plan investments in the last year. But only one in five have taken steps in the past year to increase fiduciary oversight, including switching companies or consulting with a professional. General retirement planning is also an apparent need among the small business community. The majority (63 percent) of small business owners are not very certain they've appropriately planned for their business' future. Retirement or transition are key areas of concern, second only to recession and economic issues. In fact, in terms of revenue, the smallest and largest companies were most concerned about retirement planning.
Ethics: (Scott Simon 2003) Ethical malfeasance occurs when an investment manager does something deliberately or conceals it (the manager knows that it's too drunk to drive, but drives anyway). For example, consider a manager who invests intentionally at a higher level of risk than the client chose without informing the client and then subsequently generates a higher return than expected. The average return that is achieved over time exceeds that for investments at the client's selected level of risk. The manager attributes the excess return to its superior investment skill
Ethical misfeasance occurs when an investment manager does something by accident (the manager really believes that it's sober enough to drive). For example, consider the manager who can't manage cash properly or delays converting cash into investments. This incompetence causes the client's money to sit and forego expected return since it is exposed to a lower level of risk than the client selected. Thus the manager does not know what he is doing and should not be managing money.
Fiduciary: (2003) Under California case law, stockbrokers owe a fiduciary duty to their clients. (Twomey v. Mitchum, Jones & Templeton (1968) 262 Cal.App.2d 690.) The relationship between a broker and principal is fiduciary in nature and imposes on the broker the duty of acting in the highest good faith toward the principal, which duty embraces the obligation to render a full and fair disclosure to the principal of all facts which materially affect his rights and interests. When there is a duty to disclose, the disclosure must be full and complete and any material concealment or misrepresentation amounts to fraud." (Hobbs v. Bateman Eichler Hill & Richards (1985) 164 Cal.App.3d 174.)
The relationship between a stockbroker and his customer is fiduciary in nature and the duty is owed to a customer who is both sophisticated and unsophisticated, according to Duffy v. Cavalier (1989) 215 Cal.App.3d 1517.
Moreover, the NASD holds that stockbrokers are fiduciaries--if for no other reason than because of the fiduciary duty to "know your customer." This requires knowing everything relevant about the customer's account, including the amount that the customer is willing to "lose" in his or her account. In addition, if the customer believed that he or she was making money, but the stockbroker knew that the client was losing money, the stockbroker would have a duty to inform the customer.
Fiduciary duty requires disclosure of all relevant facts about the customer's account. Fiduciary duty requires learning everything relevant to the customer's account and his or her risk tolerance and then rendering appropriate advice.
"Willful blindness" is the legal term to describe how people deliberately avert their eyes so as not to be held responsible for a particular action. In political circles, the term "plausible deniability" describes similar behavior. Neither is likely to work as a legal excuse, and both certainly fail on any ethical register.
they have a fiduciary and ethical responsibility to know about the major financial decisions made within a company.
"If they didn't know, they're incompetent," said Nell Minow, editor and co-founder of the Corporate Library, a research firm in Washington that monitors corporate boards. "And if they did know, then they're crooks. By accepting those jobs you are saying, 'I will make it my business to know.' "
* "If you choose not to know something, especially if that something is something you should know, you are morally blameworthy,"
Robert P. Lawry, director of the Center for Professional Ethics
Cheating- Interview with author David Callahan. Why are people cheating so much? (2204)
To start with, we live in a winner-take-all society. Winners get paid more these days, so people will do whatever it takes to be a winner. Meanwhile, everyone is under more pressure to perform well starting from a young age, in school, and extending into the workplace so that they are not left behind by the economy. That kind of stress provides a lot of incentive to cut corners. And I look at two other reasons for cheating: government watchdogs haven't been given enough resources to enforce the law, and many Americans are cynical that the rules in our society are fair, so they feel it's justified to cheat. As I see it, all of these reasons are related to the overarching trend in American society toward more free market competition. We’ve become a society divided between a Winning Class that is richer than ever and often cheats because it can get away with it. And an Anxious Class that cheats to move up in the world – or just stay afloat.
Why aren't cheaters punished more often?
The biggest problem is that government has been weakened over the past two decades. The IRS and SEC, for example, don't have the resources to crack down on tax cheats or effectively police corporate America. But professional associations also do a poor job of policing their members. Again and again, dishonest lawyers, doctors, stockbrokers and other professionals are not disciplined by professional watchdog groups. Too often, these groups protect their members not the public. At a larger culture level, Americans love a winner and admire the wealthy. It’s easy for rogues with a big bank account to buy themselves respect. Witness the rehabilitation of Michael Milken in recent years.
What can be done about cheating?
A. Different forms of cheating have different solutions. I emphasize a few big points. First, we need to strengthen the government agencies that enforce the rules of fair play, starting with the IRS and the SEC. Washington patted itself on the back after passing corporate reform legislation in 2002, but the watchdogs still don’t have the muscle they need to get the job done: witness the SEC failing to detect all the problems at mutual funds. Second, businesses, professional groups, and sporting leagues must get more serious about instilling ethics and must police their own ranks more effectively. For example, the NFL should have suspended the four Oakland Raiders who recently tested positive for steroids. Third, schools and universities must have stronger honor codes and make a new commitment to teaching integrity and building character. That stuff works and there’s research to prove it.
More ethics: (2004) While financial scandals dominate the news headlines, U.S. workers are far more likely to cite hypocrisy and favoritism as the biggest ethical problems in the workplace. (Watson Wyatt Worldwide)
The survey of 1,200 U.S. workers found that a vast majority of employees –72 percent – believe that their immediate bosses behave with honesty and integrity, although they are somewhat less certain about top management – and even their co-workers.
When asked to elaborate on why others' behavior lacks honesty and integrity, workers were far more likely to cite hypocrisy and favoritism (62 percent of those who question top management's integrity cite this factor) than dishonest financial dealings (8 percent) and investor-related violations (2 percent).
Ethics: (NY Times 2004) If there are any ethics courses, many students say the material is general or detached from the rest of the graduate curriculum.
In a recent survey , roughly half of the 1,700 graduate business students who were interviewed said they thought they would have to make a decision in the future that would test their values. Only 22 percent said their schools were doing "a lot" to prepare them to manage value conflicts. One in five respondents said they were not being prepared at all.
"Everyone comes out thinking they're an ethical person. "And then all of a sudden you're working and there's money at stake."
Dr. Amitai Etzioni, who taught ethics at Harvard Business School in the 1980's, said that while many business schools had begun offering ethics courses, "they ghettoize the class." "And most of the time the message to students is, 'Find a good lawyer so you can justify what you're doing.' " "It doesn't tell you there are some basic values, that certain things are wrong."
I just don't believe it: (NY Times 2004) "If there is any message that has been delivered by the government in its almost three-year battle against corporate corruption, it is this: The truth will keep you free. Indeed, even if no further indictments or convictions are obtained in the cases, the government has signaled that there have been far-reaching changes in the expectations for truthfulness when corporate executives communicate with shareholders.
Often, corporations relied on the wiggle room created by the law to keep things cheery. Facts that were deemed immaterial - an often subjective standard of whether certain information would change the investing decisions of the public - did not have to be reported. Opinions, under a Supreme Court ruling, were not actionable absent direct proof that the speaker had knowledge of their falsity. And what is known as puffery - positive spin put on facts for the purpose of making them seem as good as possible - was just an accepted part of doing business.
Now, with a number of the recent legal cases, and particularly with the Lay case, experts said, the government has shown no tolerance for statements that served to deceive, even if they might have been allowed in the past. Government officials make clear that they are trying to tell corporate executives that skewed or deceitful public comments damage the capital markets, and will be taken seriously.
In addition to laws passed by Congress to impose stricter standards for corporate governance and accounting accountability, state officials also imposed their own truth-telling regimen. Eliot Spitzer, the New York State attorney general, extracted huge settlements from investment houses whose securities analysts printed upbeat reports on companies they covered, even while privately deriding their financial prospects to colleagues.
prosecutors have made clear that part of their intent in the deal was to affect behavior throughout the securities industry. After all, now every firm is on notice that if it enters into a transaction that allows a company to deceive investors, the participants in the deal could find themselves in a criminal courtroom, with the rationalizations that justified their dealings now being picked apart by a jury."
Lovely words. But there is not an officer or director of any planning organization from California (and approximately 35+ other states) that are legal.
Goal setting and Cheating: Why They Often Go Together in the Workplace (2004) From childhood on, individuals are told that setting goals for themselves will make them more diligent, more focused and generally more successful in whatever they set out to do – whether it’s win tennis games, ace their exams or become CEO of their company.
But goal-setting also has a dark side to it, according to a recent research paper by a Wharton faculty member and two colleagues. In addition to motivating constructive behavior, goal setting – especially when it involves rewards – can motivate unethical behavior when people fall short of the goals they set or that are set for them. The relationship between goal setting and unethical behavior is particularly strong when people fall just short of reaching the goal.
In “Goal Setting as a Motivator of Unethical Behavior,” Maurice Schweitzer, professor of operations and information management at Wharton, and colleagues Lisa Ordonez form the University of Arizona and Bambi Douma from the University of Montana, argue that while goal setting – a common managerial tool – can be used beneficially in organizations, it can also encourage people to misrepresent the success they have had in meeting certain targets.
The authors cite earlier scholarly research showing that “goal attainment is associated with psychological rewards, including positive self-evaluations and higher self-satisfaction.” The authors suggest, however, that people also “incur psychological costs from admitting goal failure” and that “psychological factors can motivate unethical actions after people fall short of goals. In particular,” the authors note, “we expect people with unmet goals to be more likely to misrepresent their performances than people without specific goals.”
Meeting Your Fiduciary Responsibilities (2004) Offering a retirement plan can be one of the most challenging, yet rewarding, decisions an employer can make. The employees participating in the plan, their beneficiaries, and the employer benefit when a retirement plan is in place. Administering a plan and managing its assets, however, require certain actions and involve specific responsibilities.
To meet their responsibilities as plan sponsors, employers need to understand some basic rules, specifically the Employee Retirement Income Security Act (ERISA). ERISA sets standards of conduct for those who manage an employee benefit plan and its assets (called fiduciaries). Meeting Your Fiduciary Responsibilities provides an overview of the basic fiduciary responsibilities applicable to retirement plans under the law.
Fraud: (2005) Why does it still exist? Per Wharton legal studies professor Thomas Donaldson, "government is far from the action and “notoriously inept at knowing what’s going on in detail inside the corporate decision-making mechanism.”
For too long, “we have followed a mythology that if you write an elaborate code of ethics, appoint people to distribute it, and get everybody to sign off on a fat rule book every year, this will somehow prevent major disasters. We have abundant evidence now that it simply doesn’t work this way.”
The “big truth is that there is only so much we can gain from corporate compliance programs and corporate governance.” “The devious behavior of men and women knows no bounds.”
From a Morningstar journalist, in part, "It is often claimed that most risk of the overall stock market can be diversified away by holding, say, 40 or 30, or even just 10 stocks. For example, a booklet published by the American College of Trust and Estate Counsel, a group of the most elite estate-planning attorneys in the United States, states: "Empirical studies have shown that a small amount of diversification goes a long way. For example, it has been shown that a portfolio of 10 stocks provides 88.5% of the possible advantages of diversification. A portfolio of 20 stocks provides 94.2% of the advantages of diversification."
Other studies tell much the same story. For example, holding two stocks instead of one stock reduces uncompensated risk by 42% in a randomly selected portfolio. Holding six stocks instead of one stock reduces uncompensated risk by 71%, and holding 20 stocks instead of one stock reduces uncompensated risk by 81%.
Restatement Commentary also picks up on the claim that most risk of the overall stock market can be diversified away by holding relatively few stocks: "Significant diversification advantages can be achieved with a small number of well-selected securities representing different industries and having other differences in their qualities."
Diversification of Uncompensated Risk
Restatement Commentary notes that the duty to diversify risk is based on principles of Modern Portfolio Theory. One central principle is that total portfolio risk is comprised of two kinds of risk: compensated risk and uncompensated risk.
Uncompensated risk, which comprises about 70% of total portfolio risk, reflects how the market price of a particular stock is impacted uniquely by economic and non-economic news. For example, the price of Microsoft stock may go down as a result of the departure of a key Microsoft executive.
Uncompensated risk is avoidable by an investor that invests in the stock market. An investor holding only Microsoft stock can protect itself against this risk by also owning stock in companies that are unaffected by the departure of Microsoft executives.
Restatement Commentary further notes: "The ultimate goal of diversification would be to [completely eliminate uncompensated risk and thus] achieve a portfolio with only the [compensated] … element of risk." Commentary to Section 3 of the Act adds: "The object of diversification is to minimize [the] uncompensated risk of having too few investments."
A fiduciary, then, ordinarily has the duty to diversify the uncompensated risk in a portfolio. Restatement Commentary describes the penalty for not doing this: "Failure to diversify on a reasonable basis in order to reduce uncompensated risk is ordinarily a violation of both the duty of caution and the duties of care and skill." These three duties comprise the very meaning of "prudence."
A Little Means a Lot
So while it's accurate to say that a substantial amount of risk can be diversified away in portfolios that hold, say, 10 to 50 stocks, fiduciaries should understand the potential consequences when not all (or nearly all) risk is eliminated.
That "not all (or nearly all)" is what active money managers (even--and maybe particularly--those even at the largest, most prestigious money management institutions that typically hold portfolios of only 20 to 40 stocks for high-net-worth clients) "leave on the table" as seemingly small amounts of uncompensated risk. Uncompensated risk for which investors receive no return (that's why it's called "uncompensated") can also lead to less return--sometimes a lot less.
It's crucial for fiduciary investors (as well as non-fiduciary ones) to understand that in this context "a little means a lot." Underperforming the market by even one percentage point on an average annual basis can, over time, result in large amounts of dollars left on the table. The flipside of this, of course, is the enormous wealth added to the table by Sir John Templeton and John Neff, who each outperformed the market by two to three percentage points on an average annual basis over more than 30 years.
Those investing for themselves can freely hold portfolios with whatever amounts of uncompensated risk they desire. Some of these investors, rather than underperforming the market by, say, two percentage points on an annualized basis, may outperform it by that much.
Those investing for others--fiduciaries--generally do not have such luxuries. Fiduciaries are required by principles of modern prudent investing to consciously assess portfolio risk. That ordinarily includes minimizing uncompensated risk to avoid leaving large amounts of dollars on the table. The most efficient and effective way to avoid that risk is to invest in a passively managed portfolio.
This was not the whole article since my attempt was to view the areas of diversification. I did not totally agree since the statistics identifed by the Estate Planning attorneys was outdated. "The position on diversification used by some advisors is no longer current. It takes at least 50 stocks to reach the level of diversification due to the higher volatility of the individual selections. Some suggest it is as high as 350. It does not seem real life to address the 10 to 15 stock position since it is no longer valid.
From my site, "Diversification 2001 by John Y. Campbell , Martin Lettau, Burton G. Malkiel and Yexiao Xu: This paper uses a disaggregated approach to study the volatility of common stocks at the market, industry, and firm levels. Over the period from 1962 to 1997 there has been a noticeable increase in firm-level volatility relative to market volatility. Accordingly, correlations among individual stocks and the explanatory power of the market model for a typical stock have declined, whereas the number of stocks needed to achieve a given level of diversification has increased. A portfolio once required 12 stocks (I used 13 in my teachings) to properly diversify and track the S&P 500, but the reducing correlations pushed that to 50. A WSJ article noted that a University of Nevada article says that investors need up to 100 stocks to stay within 5% of average portfolio risk. Research by CooperNeff show investors need 350."
As for offsetting the Microsoft stock- or groups of stock- it also means that the correlations (cross and serial) be known at the time of purchase. This is not the case since correlations are only known in hindsight. So the attempt at offsetting the risk will only be shown to work (or not work) after, perhaps, a year has passed. And then so much other stuff has happened that it might be impossible to figure it out anyway.
As to a passively managed portfolio- generally fine. But passively also tends to mean that you can leave the portfolio alone- say 2000- 2002. Not so. A fiduciary is required to always review economics and adjust as necessary. It is the risk that is the key to investing, not reward. If a fiduciary left a passive portfolio in the S&P 500 during that three year's debacle, he should be sued for failure to account for a situation that was identified in past history- 1973/74. A rationalization that a passive approach would have had a, say, 40% loss while a actively managed portfolio would have had a 50% loss is not acceptable. You do not stay in equities when the economy is burning. A fiduciary has to know the inverted yield curve, productivity, manufacturing, leading, coincident and lagging indicators and be able to prove that they had analyzed same professionally. Very few in the industry can do it. Few even try."
You do use funds with low expenses- that is a key. And generally low turnover- though that is not available in bond funds.
Integrity: (2006) Trevyor Sargent has identified integrity as being a core value of ethics. Acting with integrity also happens to be the first principle of our ethical code of conduct. If we are really to "walk our talk," it is of fundamental importance that we integrate the ethical principles we have articulated into the operational fabric of our daily professional-and I dare say personal-lives. If we do otherwise, we are simply compartmentalizing ethics into a professional continuing education requirement that we dutifully comply with, and then dispense with thinking about until the next year. Most of us probably believe ourselves to be acting with integrity.
The research on this is an eye opener, but, in some ways, not that surprising. Ann Tenbrunsel, of the University of Notre Dame, cites research showing that the benefits of ethical training are short-lived2 and that ethical codes of conduct, which are usually part of the ethical training, produce no discernible differences in behavior.3 She describes the typical ethics training as including "an overview of ethical theory, discussion of ethical principles, and applications of such principles using a case-based approach."
While Tenbrunsel still sees value in such training programs, she attributes their shortcoming to their failure to address some of the more fundamental personal issues such as the capacity for self-deception. In Tenbrunsel's words, "Self-deception allows one to behave self-interestedly while, at the same time, falsely believing that one's moral principles were upheld."
Recent research by Gino and Bazerman of the Harvard Business School presents evidence consistent with the view that many unethical acts occur without the awareness of the person engaging in the unethical conduct. Among their conclusions is that unethical behavior is most likely to follow the path of a slippery slope in which ethical conduct declines in such gradual increments that it goes unnoticed until it is too late.5 Somehow, well-intentioned people go astray and don't even realize it until it is too late.
* It is through experience and engagement that moral development and, consequently, expertise in ethical decision-making arise. Our current system of compliance with regulatory requirements, adherence to a well-articulated professional code of ethics, and fulfillment of our continuing education requirement may be a necessary and good starting point. They are not sufficient, however, to facilitate the rise of the financial planning profession as a model of professional excellence earning the highest recognition and esteem of the public. What is needed is a high-profile, pervasive, professional forum of engagement for the ongoing discussion of the relevant and subtle ethical concerns of practitioners. Mere compliance with professional and regulatory ethical requirements is insufficient if we are to fulfill the potential of what our profession can really be.
An experiment on corruption and gender (Fernanda Rivas 2007) Abstract: There exists evidence in the social science literature that women may be more relationship oriented, may have higher standards of ethical behavior and may be more concerned with the common good than men are. This would imply that women are more willing to sacrifice private profit for the public good, and this would be especially important for political life. Many papers with field data have found deference’s in the corrupt activities of males and females, but given their different insertion in the labor market and in politics, it is not clear if the differences are due to differences in opportunities or real gender differences. The aim of this paper is to see if women and men, facing the same situation behave in a different way, as suggested in the field-data studies, or on the contrary, when women are in the same position as men they behave in the same way. The results found in the experiment show that women are indeed less corrupt than men. This suggests that increasing women’s participation in the labor force and politics would help to reduce corruption.
Docility and “through doing” morality: An alternative approach to ethics (2007) In this paper, we aim at presenting the distributed morality approach as it can be described by the docility model of social interactions. The proposition “morality is a matter of social interaction” constitutes our starting point. We aim at pointing out the ways through which individuals create moral alternatives to a given situation. The paper is dedicated to presenting morality as something connected to human cognition. We introduce a “manipulative” way of thinking about morality, and we argue that it is “distributed” through things, animals, computers, and other human beings (section I); furthermore, the idea of a type of “through doing” morality comes up. Then, we find that this model supports an alternative view of the socio-economic system and, therefore, we suggest that the docility model (section II, as amended from Simon’s original model 1990; 1993), fits the case. The field of business ethics exempts useful insights from research on this issue. Recent studies on moral thinking and moral imagination seem to support this research project.
Trust- (2007) From an individual point of view it is less clear that increased trust is beneficial, since it depends on whether others will exploit the vulnerability that is associated with trusting someone. On the other hand, it is always beneficial for an individual to be perceived trustworthy, whether he actually is trustworthy or not. Obvious real life examples include the possibility to borrowing money, selling a used car and getting a job. It is therefore important to analyze who people in general consider to be more and less trustworthy what we are interested in here is not trust but perceived trustworthiness. The distinction is important since I may trust another person because I believe that he or she (e.g. ones spouse or close friend) will behave particularly trustworthy towards me. A Hells Angels member Adam may trust another member Bill more than he trusts Carl who is not a member, but at the same time realize that Bill is generally less trustworthy than Carl
Fiduciary duty (2007) The Securities and Exchange Commission said it would not appeal a March 30 federal court decision overturning the so-called Merrill Lynch rule, which allows stockbrokers offering financial advice for a fee to avoid a legal obligation to put clients' interests ahead of their own.
For independent advisors and financial planners subject to that obligation, the rule has served as a ready-made cudgel to use against big Wall Street brokerage firms. Now brokers offering fee-based financial advice will be held to the same standard, potentially weakening the issue as a selling point for independent advisors.
"If you are a fiduciary, it means people are putting their trust in you. Their interests should come before yours. Traditionally, that has not been the case for the brokerage community. The firms want brokers to just collect assets and put people in products,"
Here is the problem- first of all, the title. It says financial advisers, NOT investment adviser. If you offer FINANCIAL advice, you are covering areas beyond pure investments- certainly a fiduciary would so state. And it would include, obviously, the areas of retirement, estate planning and more. And it must consider insurance. But in California, at a minimum, a FINANCIAL adviser must have a license in insurance. None of the supposed fiduciaries do. Click the link to see the comments from NAPFA et all in 1998. I think a lot of planners are going to get hurt by this fiduciary duty that the FPA has effectively forced on their minions.
Susan John, chairman of the government affairs committee for the National Association of Personal Financial Advisors, says that some states -- including New Hampshire, Maine, California and Massachusetts -- require licenses to give advice about insurance products. California, Texas and Maine require people to sell insurance before they can give insurance advice. "It's a problem for everybody that's in financial planning if they're doing comprehensive work," Not a single NAPFA member has ever been licensed.