Ethics: Being a CFA® Charterholder Addressing the Question of Ethics
Ethics is one of the most fundamental responsibilities of professionals in the financial services industry. As trusted advisors, we are given a mandate by our clients to manage, preserve, and grow their assets and to operate in their best financial interests. Whether this fiduciary duty is executed in a discretionary asset management, consultant, or broker/dealer role, our industry expects all professionals to act ethically and in the best interest of the end client.
As we execute our daily tasks and responsibilities in the financial services industry, ethically related questions will surely arise. Is this leverage and liquidity appropriate for this client’s portfolio based on current risk tolerances? Are these management and performance fees acceptable in the marketplace and for this investor? How should we allocate this complex trade structure across various clients’ accounts?
To answer these questions, one must first look to securities law—that is, what is legally permissible in the industry and in a particular regulatory jurisdiction—and incorporate one’s professional knowledge and sound judgment. Once that framework is applied, if so-called grey areas remain, what should drive one’s decision-making to arrive at the proper final conclusion? This is where ethics and professional standards are needed and can lead the professional to selecting the correct course of action.
What Can I Expect to Learn in the CFA program in Regards to Ethics?
Within the CFA program, candidates are ingrained with the Code of Ethics and Standards of Professional Conduct throughout the curriculum. These principles provide candidates and charterholders with an ethical benchmark used by investment professionals globally.
Per CFA Institute, ethics is defined as a set of moral principles or rules of conduct that provide guidance for our behavior when it affects others. Widely acknowledged fundamental ethical principles include honesty, fairness, diligence, and care and respect for others. The Professional Standards delve into more granular principles within the areas of professionalism, integrity of capital markets, duties to clients and employees, investment analysis, recommendations and actions, conflicts of interest, and the responsibilities as a CFA Institute member or CFA candidate. The CFA Code of Ethics and Professional Standards will offer valuable direction to CFA charterholders in making ethical, fiduciary, and responsible decisions.
There is significant depth to this topic in all three levels of the CFA curriculum as Ethics and Professional Standards account for roughly 10–15% of all the CFA study sessions and material. In fact, Ethics and Professional Standards hold a lofty 15% weight of this year’s Level I exam and a 10–15% weight for both the Level II and III exams. Placing such meaningful emphasis on ethics clearly demonstrates the importance CFA Institute views this aspect of professional conduct.
Applying Ethics in the Real World
Throughout my years of managing trading, marketing, and investor relations at an international hedge fund, many of the questions highlighted earlier arose at one point or another. In my decision matrix, I would first apply the appropriate legal and regulatory rules and then leverage my professional knowledge and my understanding of ethics and professional standards.
Additional examples can shed light on the challenges of making ethical decisions in practice. As an analyst or portfolio manager, one must consider if the company-specific information gathered for stock selection is acceptable, publicly available, and if an allocation based on this research is appropriate. An investor relations professional might question if they are properly disseminating certain data fairly to their various stakeholders while also respecting their clients’ privacy. Applying your CFA ethics tool set in these scenarios should increase the probability you will take the correct action and achieve an ethical outcome.
Unfortunately, there have been many instances where ethics and professional standards were ignored and led to significant negative impacts to clients, financial markets, and the public’s opinion of financial services professionals.
One case I vividly remember was the devastating 2008 Bernard L. Madoff Investment Securities LLC scandal, where this firm’s Ponzi scheme led to investors losing most, if not all of their capital invested in the fund. Approximately $65 billion of customer account losses, including fictitious profits, were reported when the scandal hit. This dire situation also had a major market impact as illiquid stocks were then sold at steep discounts to their fair market value during forced unwinding of affected investors’ portfolios.
We can also recall numerous cases of insider trading, money laundering, and market manipulation that all display unethical and unprofessional actions. The broader impact of these types of fraudulent acts has led to increased global regulatory oversight of our industry to protect the public and investors from future harm. Sadly, the financial services industry is still struggling to regain the trust of the public, while bearing the cost of operating in a heightened and significantly more expensive regulatory environment.
Ethics at the Forefront
As we look forward to the next generation of financial professionals, there are indeed positive impacts seen with the strengthened and heightened emphasis being placed on ethics and professional standards in our industry. The growth of ESG (environmental, social, and governance) investing is a clear indicator that asset allocators care greatly about how market activity affects society and all stakeholders. Increasingly today, institutional investors, large endowments, foundations and corporations are now making ESG a priority within their portfolio exposures. Additionally, there is a rising expectation for investment professionals to hold a CFA designation, which likely correlates to a stronger demand to partner with a skilled, educated, and responsible professional with solid ethics training.
Being a CFA charterholder and having studied ethics throughout the curriculum, I gained valuable knowledge and a tool set that I have been able to apply in the real world of finance. We know that holding a CFA designation does not guarantee that one will act ethically as applying ethical behavior is based on individual choice. However, the knowledge and training received in the program instills a strong understanding of both proper actions as well as the potential for negative impacts when ethics are not taken into full consideration.
About the Author
Joanna Horowitz, CFA, is currently a senior consultant for Monticello Consulting Group’s alternative investment advisory group. With over a decade of experience, Joanna has managed the marketing and investor relations functions for an international hedge fund and has significant trading experience in global markets. She previously managed all trading activity at the fund, including equities, hedges, derivatives, and FX trading through multiple market crises. Ms. Horowitz received her BA from Towson University and is an active member of 100 Women in Finance and High Water Women.
All views in this article reflect Ms. Horowitz’s personal opinions and do not reflect those of her previous and current employers along with the various organizations cited herein.