Page 266 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 14: Regulatory Environment

ethical boundaries. Even scrupulously honest financial planners can now face real dilemmas Notes
when trying to do the right thing for their clients.

14.7.1 Uncharted Territory

A generation ago, both the tax code and the financial products and services available were
simpler than they are today. For example, if someone wanted to buy stock, a stockbroker would
place the trade. If someone needed permanent life coverage, a whole life policy was issued. But
now, planners must decide if this traditional approach is better, or whether the client would be
better off buying any number of the diverse modern products available.

The modern maze means every financial planner faces an ethical dilemma when trying to do the
right thing for a client.
Ethical concern involved in financial planning states that the client’s interests should be put
ahead of the financial advisors interests at all times and in all situations. All financial planning
services must now be accorded the care of a true fiduciary, as opposed to merely acting in the
client’s best interest. This also constitutes a major step up in terms of responsibility, as fiduciaries
have a strict set of rules and guidelines that must be followed at all times.

14.7.2 Fees vs. Commissions

The flexibility to choose between fee based or commission based services charge also present a
moral dilemma for planners.
A fee-based planner, one who charges clients based on a percentage of their assets, will increase
his or her compensation simply by making the client’s assets grow. If the planner charges the
client a fee of 1% of assets under management, then the annual fee collected from a ` 100,000
portfolio will be ` 1,000. Therefore, if the planner is able to make the portfolio grow to ` 150,000,
his or her compensation will increase accordingly. This type of compensation could motivate
the planner to employ more aggressive investment strategies than a traditional commission-
based broker.
A commission-based planner, on the other hand, is compensated for each transaction, regardless
of portfolio gains or losses. These brokers face the temptation to generate transactions as a
means of revenue, even if they manage to avoid the technical definition of “churning”.
14.7.3 Sales vs. Advice

The boundaries between sales and advice in the financial industry are also becoming increasingly
blurred as new platforms and methods of doing business continue to emerge. What this usually
boils down to is getting clients to do the right thing for the right reason.
Planner should obviously need to get their client to diversify their holdings with a sensible
asset allocation, or perhaps at least consider some sort of immediate annuity option. But how far
should they go in encouraging them to do this? Is it okay for you to use aggressive, fear-based
sales tactics, or even bend the truth a little, in order to help their client? After all, it clearly is in
their best interest to do this.

14.7.4 Bottom Line

Thus it can be said that with the growing complexity of financial services, financial planning in
today’s world depends more than ever upon understanding a client’s individual situation and
objectives, and being willing to do right for them. The correct application of ethics in modern

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