Ethical definitions

ETHICAL DEFINITIONS

Martin Luther King, Jr.

Rather than continually define the definitions and parameters of ethics that are used throughout the ethics text and within other areas on this web page, I have decided to put some of the basics on this page so that once you remember these, the other articles become clearer and less repetitious.

Be aware of several aspects of these comments. I teach ethics as part of continuing education to insurance agents as well as most other areas of investments. I therefore imbue these elements of ethics in all other classes that I do since I have found that a good amount of the practices I have seen in all phases of insurance, securities and financial planning leave a lot to be desired. In fact, my real life experiences and contacts with people involved in investments, arbitrations, etc. leads to this, "It's a lot easier to talk about your ethics than to live up to them." As such, I feel it is mandatory that all investment entities present ethics courses to their reps in order to not only provide ethical insight to the sale of products or for charging a fee, but to also identify the necessity of increasing knowledge in order to discuss the offering of investments and insurance to the unsuspecting and unsophisticated public. However they are not- and cannot be- a substitute for the inherent character of the individual. If the individual his/herself is not grounded in the fundamentals- which has happened a lot during the last two decades of the "me" generation- then the rest of us must work harder to force such recognition. Admittedly, some of it is still nothing more than lip service, but it appears to be getting better with a more traditional focus on family values.

To the point: you must recognize that ethics and the law are NOT the same. This is apparently a sticking point with some organizations that will apply ethical standards if, and only if, a legal violation has occurred. But from the National Association of Realtors, as part of their ethics course, is a statement that clearly defines ethics as a requirement beyond that of the law: "Law and ethics overlap, but ethics is much more extensive, continuing on where the law leaves off". This must be applied to ethics requirements for all securities, planning and insurance fields.

PRUDENT/EXPERT MAN RULE

In context with these definitions is the issue of what can be expected of an agent. To that I offer the basic prudent man rule and then present what could be expected of one with more- or supposedly more- expertise.

For example, standards in certain cases draw upon what would a prudent man have done given the same circumstances. The actions of the defendant may be compared to those efforts and the defendant judged accordingly. However, once one presents him/herself as an expert- either through the designation or degrees attained, etc.- then that person will be held to the standards of someone of that capability. A Certified Planner, ChFC, CFA, etc. cannot hide behind simply what a prudent man would have done due to their expert- or at least perceived expert- knowledge and ability.

This latter observation takes on additional significance with those that use titles such as Financial Consultant, Senior Vice President and so forth, but have no additional background other than basic licensing. (At this point, you need to recognize the limited, if not negligible, licensing training in risk and reward. See Who Can You Trust for more detail.) It is my contention that they must be held to the higher standards of an expert due to the perception by the public of significant additional expertise. Admittedly, the defense could be that the customers using them knew of the ruse and therefore the defendant can escape the higher scrutiny. However, having been involved in such situations in arbitration and numerous other financial disputes, it is clear that advertising and use of special monikers do induce the perception of capability as portrayed- primarily since no additional research is rarely ever done by consumers subsequent - and the fact of the almost universal belief that such attainment of such titles could never have been reached without the corresponding competency. As an example, many broker firms use newspaper articles which are ghost written. But without confirmation of that fact, general readers are induced to believe that the broker in the picture or identified as the author has the expertise as delineated in the article. I easily submit that the use of ghost written articles is legal. But I also state that without a clear representation that the author is someone else, such articles are misleading to consumers and therefore unethical.

To pursue this line of issue, I quote from a real estate case regarding prudent man and expert..."an agent claiming expertise within a specialized area is charged with operating within the standard of expertise of those who are truly experts." The California Real Estate commissioner suggests that one "advertise or claim to be an expert in an area of specialization.....only if the licensee has had special training, preparation or experience in such area." I'll add a caveat however in that experience by itself may not be a measure of expertise at all. Some quoting this distinction of having 20 years worth of experience in a particular area may have taken one year's worth of experience and repeated it 20 times. In simplistic endeavors, perhaps not a problem. But in more sophisticated areas, it's relevancy pales. Take, for example, a witch doctor with 20 years experience. Is someone to say he has the ability to perform operations?

The National Association of Realtors also has their own specific guidelines. They state, paraphrased in part, that "agents shall not undertake to provide specialized professional services concerning a type of (activity) that is outside their field of competence unless they engage the assistance of one who is competent on such types of (activity) or unless the facts are fully disclosed to the client."

This takes on particular significance for many financial planners in California who say they are providing competent fee advice. This is discussed more fully in the text area on ethics.

MORAL EGOISM AND VEIL OF IGNORANCE

There are several other essential elements for discussion that are developed from the ethics course currently offered through Securities Training Corp (STC) as securities continuing education, from the text, Applied Management Ethics by Andrew Sikula, Jr., (professor in ethics for the California State University at Chico- highly recommended), Richard Irwin, 1996 and Business Ethics, by Joseph Weiss, Wadsworth Inc, 1994.

These next two areas- Moral Egoism and Veil of Ignorance- should be must reading for anyone alive and are paraphrased from the material offered by STC. They relate to the Golden Rule- as does most ethical training- but provides human insight that can be used for almost any situation. They are simple, straightforward and easily applied.

Moral Egoism: This term is used in literally every class I do, not just ethics. It means that one can justify literally any action they want because IT IS IN THEIR BEST INTERESTS. No matter what they do, or their family, or their company, or their candidate, etc., the actions can be justified on the basis that it was in the best interests of those who wanted the action. It is irrelevant what impact- obviously negative- the actions might have on others because that does not enter into their equation. So the next time your wife, husband, children, boss, company or who/whatever does something that seems to be stretching the bounds of ethics, see if they weren't using this rationalization. See also if you can get them to recognize how cheap the rationalization really is.

Veil of Ignorance: Here is the way to force people to be responsible for their (your) actions- assuming they are willing to be somewhat objective. For any action, simply put a veil of ignorance between you and the action taking place. Pretend that the results had absolutely nothing to do with you or anyone close to you, your company, etc. Just look at the actions as an independent entity and see if the actions are what an ethical person would have done. You would be amazed that through independent focus, the ethical clarity is clearly identified.

Of course, the trick is to get others to use and recognize its qualities. But these is nothing sneaky or juvenile about it. Use this, it works.

GENERAL GUIDELINES

Other comments on ethics may be developed thorough just a few to, perhaps, a dozen simplistic positions: some are shown below.

1. Does it seem right?

2. Is it fair just to you, your family or associates? What about the impact to those not directly associated to you (associates, neighbors)?

3. Would you want someone else to perform this action on you, your family (mother, grandmother), etc? In essence, the "Golden Rule" review. (The immediate issues that come to mind is the sale of limited partnerships in the 80's and the churning of life insurance policies in the 90's.)

4. Would you teach this activity to your children?

5. How would you feel if this action were exposed to others, your spouse, children, parents? What about if it was exposed to the press?

Here are some additional commentary from NAR, paraphrased for including to any activity.

1."Questionable or fraudulent practices are not to be condoned....

2. Knowingly making a substantial misrepresentation of the likely value of property or an investment....to induce a buyer to make a purchase

3. Knowingly making a false or misleading representation to others....

4. The broker (sales agent, licensee) owes his principal full and complete disclosure of all material facts that may, in any way, influence the principal's decision, actions or willingness to enter into a transaction. (this is VERY important and discussed further under the duties of a fiduciary)..

The last is one where I feel it is absolutely necessary to understand its relevance.

5. Knowingly making a false or misleading or representing, without a reasonable basis for believing its truth.... This is developed further below and is absolutely critical to all areas of the financial industry- yet rarely recognized.

KNEW OR SHOULD HAVE KNOWN

I paraphrase from Business Ethics and from Manuel Velasquez, in his book Business Ethics, Concepts and Cases, wherein he says that individuals are morally responsible for their actions and the harmful effects they may cause- and this is most important since it is a criteria that I use in all my teaching- when the person knowingly and freely acted or where they knew the act would or could have potentially harmful repercussions on others or when a person knowingly and freely FAILED to act and where a harmful action occurred on others. Also, per Velasquez, that it was morally wrong for the person to have failed to prevent such action.

I'll apply a slightly different description in that a liability occurs where one was aware of the facts and consciously disregarded a substantial and unjustifiable risk. Further, that such liability occurs when one knew or should have known of the consequences. I submit that at least 85% of the reasons people lose money could be alleviated or eliminated through more intensive licensing training or other mandatory apprentice period requirement so that agents attain a fundamental knowledge and understanding of investment application that a reasonable person would infer given the risks involved. I suggest that the onlookers to this issue take the time to recognize that the industry is taking a conscious disregard to many of the fundamental risks as identified in any major text since alpha, beta, correlation, basis, standard deviation, etc. are addressed sophomorically, if at all.

Obviously the law can apply- in the more extreme and egregious cases- the issues of reckless endangerment. Admittedly, however, almost everyone would see that as too far fetched as applied to suitability. But I ask you, is it not possible to apply such standard to the Lincoln Savings and Loan debacle regarding such suitability to elderly and totally unsophisticated public where many lost all their savings and even committed suicide? Perhaps some brokers did not know of the risk, but I can assure you that others knew something was amiss since the commissions received were, as one broker stated, "obscene". Under the position addressed by Velasquez, many advisers are clearly acting unethically, if not already illegally, where they were aware- or should have been aware- of the harmful consequences. My point is, this never should have happened. My point is that any person who has dealt with investments can conclude that proper training/knowledge would have reduced this situation to far less grievous results.

Now, Velasquez points out exceptions to the rule- as do I. I am in agreement, at least in part, to these exceptions of ignorance and inability. But, from Business Ethics, "a person, however, who intentionally prevents him/herself from understanding or knowing that a harmful action will occur is still responsible. Also, a person who negligently fails to inform him/herself about the potentially harmful matter (actions) may still be responsible for the resultant action." It is my position that in this day and age of advanced education, there are few that are so ignorant of the facts of the real world that they are relieved of responsibility. And there are very few that, if they were able to pass a licensing exam, that do not have the ability to learn the necessary prerequisites to investment and suitability application.

Weiss provides some caveats as follows:

1. The seriousness of the act: Inconsequential harm, particularly on an inconsequential issue, is usually not considered material, though materiality to an issue is clearly open for discussion in various matters. (As an example, forgetting to mention break points on a $2,000 mutual fund investment is normally irrelevant to a loss and should not be considered material to a case.)

2. Whether, given the circumstances, the person is uncertain about his or her knowledge of a wrongdoing. (Generally, I define anyone passing a license and having two years of experience is defined as having enough intelligence and experience to identify acceptable activity.)

3. If the person was prevented from avoiding the harmful action. (Though I suggest one needs to review the degree by which someone is restricted from acting ethically.)

4. Lastly, by how much the person caused the harmful actions. (Within that context I will address real estate, securities, insurance and planning reps that are hired are hired by organizations. Within the first two years of sales/fees, I submit that the firm has greater exposure to wrongful actions of their agents whether as direct employees or independents agents. Between the first and second year and certainly after that, the agent takes on more responsibility.)

I believe that the key to ethics within the investment industries is the element of knowledge. It's addressed more fully under the text, but the crux to the issue is, if you knew or should have known of the consequences of the act, you are therefore responsible for the actions. A simplistic example makes the point. If you daughter had a brain tumor and you took her to a witch doctor in South America, the witch doctor would not be unethical for conducting some strange exorcism since his/her background did not include any knowledge of the fact that other and better methods could have or should have been conducted, or that other true professionals should have been contacted. The not knowing and the lack of an attempt to know is not wrong in this instance since ignorance and the nonexistence of societal knowledgeable did not allow the person the ability to know any better. He/her had no basis for doing other than what he/she did. But the issue is far different in the United States where such conduct would have not only been unethical, but almost assuredly criminal since any rational "doctor" knew or should have known of the proper procedures that were required and ethical.

So take this position with securities. Any reasonably objective and astute investment professional knows full well that licensees are never taught the fundamental essences of risk and reward in investments. It is not required for the exam, but is clearly mandatory under the required aspects of suitability. Therefore, any activity by that new licensee, absent other background, requires careful scrutiny by supervisors who know, or should know, that the agents have extremely limited understanding of what it is that they are doing. The firm becomes directly responsible for most of the actions by the representatives since they knew or should have known what an agent needs to recognize in the sale or advisement of any investment. As such, and absent some other background, initial licensees may be considered simply ignorant of what they would be doing because they have not yet had enough exposure to the investment arena to know what they are lacking. But, as in my example, this is America. Any objective rational and reasonably astute individual/agent would, within some period of time- which I use as a maximum of two years- recognize that they do not have the requisite skills, at least as they exist through licensing training, and must do additional work to develop the necessary knowledge regarding the fundamentals of risk and rewards in order to provide suitable investments and counsel clients appropriately. An individual continuing to actively sell investments after the two year period who has not advanced knowledge to the point of fundamental knowledge (alpha, beta, basis, diversification, etc.) is liable for ethical abuse in violating the trust of the client and the intent of the law (though rarely applied)

I will explore these issues in context within the ethics text and focusing on the various investment industries I have been involved in with real life example from clients, arbitrations, and in teaching innumerable courses to securities and insurance agents, financial planners and consumers alike. I will state for the record however, that I have not and do not find a significant level of ethical or moral standards with a lot of the investment, securities, insurance, financial planning organizations or people that I deal with constantly in this business. I do recognize this stand may be seen as cynical, self righteous, etc. but until you have had to work with the consuming public, your grandmother, a widow, growing family. etc. to recognize the inequities and low standards, I would suggest you do not take an alternative stand until you research and read further.

I can leave you with this however directly from Andrew Sikula's book

"Parents are not instilling moral values and ethics into their offspring. Educational institutions bend over backwards and go way overboard in presenting all sides of an issue, and every alternative is considered a possible outcome. Individuals with set values are teased, ostracized and seen as rigid, uncompromising and old fashioned. It is in vogue to be free-wheeling, carefree and morally flexible".

My comments to the industry to date are reflected in the last statement above. My ethical standards are considered old fashioned and uncompromising by many individuals and professional planning organizations for my beliefs that agents are woefully unprepared- regardless of licensing training and designations- to treat the unsuspecting, unsophisticated, yet trusting, public.

Regardless, I clearly state that the issues of ethics must be firmly enmeshed in our society- and more so than current in the investment arena- or more people will be harmed in the future. The surge of the stock marketplace has unquestionably masked unsuitable investments along with vast nondiversified portfolios. Moral egoism has justified a lot of wrongs. Society needs to use the veil of ignorance and apply controls to clearly unsuitable practices.

ETHICS MATTERS. CHARACTER COUNTS. KNOWLEDGE IS THE KEY.

"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

Integrity, Ben Dean, Ph.D. (2004)

Integrity Defined- The word integrity comes from the Latin integritas, meaning wholeness. Peterson and Seligman (2004, p. 250) defined integrity in behavioral terms:

- A regular pattern of behavior that is consistent with espoused values (i.e., "practicing what you preach").

- Public acknowledgment of moral convictions, even if those convictions are not popular. (Courage may be a prerequisite to integrity.)

- Treatment of others with care, as demonstrated by helping those in need; sensitivity to the needs of others. (Prior to reading this chapter in the Classification, I had always conceptualized integrity as a personal strength. However, the authors make a strong case for integrity as a strength that motivates social action.)

To summarize, integrity goes beyond speaking the truth to include taking responsibility for how one thinks and feels and what one does. It includes the genuine presentation of oneself to others (being sincere) as well as the internal sense that one is a morally coherent being.

The opposites of integrity are clearly negative: deceitfulness and insincerity.

Benefits of Integrity

The "knowing thyself" component of integrity is adaptive because it allows us to modify our behavior so that we are more effective in our lives. Carl Rogers (1961) defined the "fully functioning human being" as someone who could tune into his or her changing emotional responses, accept this information, and act accordingly.

Acting with integrity has social benefits. Research suggests that authentic people are well-liked, and they benefit from social support and the many other positive outcomes associated with enjoying close relationships with others (Hodgins, Koestner, & Duncan, 1996; Robinson, Johnson, & Shields, 1995). Robinson et al. (1995) found that people who give balanced self-descriptions, acknowledging both strengths and weaknesses, tend to be perceived by others as being authentic.

Not surprisingly, acting with integrity can make leaders more effective. Busman (1992) found that when educational administrators held themselves accountable for their decisions and led without manipulation, teachers were more likely to trust their decisions and follow their lead. In the business world, workplace relationships are more effective when managers are comfortable "being who they are" rather than following narrowly defined relationships with their subordinates (Herman, 1971).

Finally, acting with integrity can help you attract and keep your romantic partner. When individuals are asked to list desired qualities in a romantic partner, honesty almost always is at the top of the list (Steen, 2003). We can forgive friends, family members, or spouses many things, but it is particularly difficult to forgive them for misrepresenting who they are.

What Institutions in Society Nourish Integrity?

Interventions and institutions that attempt to cultivate integrity are numerous, although only a handful have been empirically evaluated.

Parents have one of the earliest opportunities to encourage integrity in their children. Children learn early on the importance of "telling the truth." A common parenting practice is to teach children that they will be in more trouble for lying about misbehaving (denying what they did or blaming someone else) than for the act itself (Quinn, 1998).

Of course parents may also unintentionally teach their children that inauthentic behavior can sometimes make life easier (at least in the short-run). For example, a child might observe parents express their desire to cancel dinner plans with their neighbors and then act delighted to see them when they arrive. Similarly, a well-meaning parent might tell a child to pretend to like a gift even if he or she does not like it.

Youth development programs that intend to encourage integrity include the Boy Scouts of America, the World Association of Girl Guides and Girls Scouts, the Children's Defense Fund, and Girls Incorporated. Although youth development programs are associated with many positive outcomes from better grades to better health, no systematic evaluations of the effects of these programs on traits such as honesty or integrity exist.

Formal lessons about integrity do not end in adolescence. Ethics courses are taught in medical schools, law schools, business schools, clinical psychology schools, and other professional programs. Often these programs focus on what not to do (and what sanctions you will face by your licensing board if you do). Peterson and Seligman (p. 209) suggest that these programs would be more likely to reach their stated goals if they placed a greater focus on what one should do to become an ethical practitioner rather than on what one should not do to avoid being unethical. (For an example of what such a program might look like, see Handelsman, Knapp, & Gottlieb, 2002.)

Exercises to Encourage Integrity

The following exercises were adapted from a list compiled by Psychologist Jonathan Haidt at the University of Virginia.

Refrain from telling small, white lies to friends (including insincere compliments). If you do tell one, admit it and apologize right away.

Monitor yourself and make a list of every time you tell a lie, even if it's a small one. Try to make your daily list shorter every day.

At the end of each day, identify those instances in which you were attempting to impress others or appear to be someone you are not. Resolve not to do it again.