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04/22/2014

Practical Ethics: Introducing a New Framework for Ethical Decision Making


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More than any other factor, investors look for individuals and firms they can trust when hiring investment professionals to safeguard and grow their financial assets. Earning trust goes beyond compliance with applicable laws and regulations. Developing trust can only be earned by engaging in ethical conduct.

Recognizing and understanding the relevant ethical principles is the first step. The CFA Institute Code of Ethics and Standards of Professional Conduct embodies the fundamental ethical principles applicable to the investment profession. These include fair dealing, full disclosure, loyalty, and diligence, among others.   

But as investment professionals, how can we translate awareness of these principles into action? It begins with becoming more aware of the importance of ethics in every day decision making. Ethics awareness leads to ethical behavior. Utilizing a framework for ethical decision making will allow you to determine an appropriate course of action before an ethical dilemma inadvertently becomes a real problem.

CFA Institute has developed an Ethical Decision Making Framework (EDM Framework) that will help you properly analyze the different approaches, identify, and eliminate negative situational influences, and ultimately make the best choice of action. The EDM Framework calls for you to identify critical information and then consider factors that may affect your decision. 

To clarify the scope and nature of the potential issue, identify: 

  • Ethical principles at issue: Which ethical principle/s is/are implicated in this situation? Are diligence, fair dealing, suitability or any of the ethical principles applicable to the investment process?
  • Duties to others: Does the situation involve conflicting duties to your clients, employer, colleagues, or your responsibility to maintain the integrity of the capital markets?
  • Important facts: Given the principles and duties at issue, what are the relevant facts that you need to know to make an appropriate decision?
  • Conflicts of interest: Are there any encumbrances or other relationships that are acting as an incentive to skew your actions?

Once you have the critical information identified, the second step is to consider other factors that can impact how you analyze this information to come to a decision. You should: 

  • Assess any negative situational influence: Situational influences or predispositions reflect both the dynamics of the environment and personal biases. These include wanting to conform to the opinion of a group, obedience to authority, responding to incentives, being overconfident in your ability to make decisions without careful reflection, or unwittingly engaging in incremental misconduct.
  • Evaluate alternative actions:  Try not to focus on the merits of one particular path but brainstorm multiple solutions.
  • Seek additional guidance: If there is time, seek out the opinions of others who can give you different perspectives or provide an independent voice to help you weigh your options.

Ethical dilemmas are a normal and predictable part of the investment profession. Just because you may find yourself in a situation where there are conflicting duties, or the proper course of action is unclear, does not mean you’ve put yourself in that position or you’ve done something wrong. But, by working through EDM framework and making a carefully considered decision before taking action, you will have the best chance to avoid being the headline in the next day’s paper.

To learn more about how complying with rigorous ethical standards is good for your career, your business, and the finance industry as a whole, register for “What Is the Future of Finance?” on May 1.  The program will also examine other skills and qualities that successful investment professionals will need to succeed in the future, as well as the business practices and systemic factors needed for a more sustainable financial industry.

–Jonathan Stokes, Director, Professional Standards, CFA Institute

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