Investment Advisor Code of Ethics
Licensed investment advisors must adhere to a code of ethics regarding business practices and client interaction. The investment advisor code of ethics is a set of standards that protects consumers and prevents inappropriate actions. Because many advisors are responsible for consumers' savings, and the security of their financial future, they are held to a moral paradigm. By understanding the code of ethics, consumers can determine if their representative is acting in accordance with industry guidelines. The Securities and Exchange Commission (SEC) and the Certified Financial Planner Board of Standards (CFP) each developed a code of ethics that advisors must follow.
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Professional Competence
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Investment advisors are obligated to demonstrate and maintain an appropriate level of professional competence. Merely acquiring a variable securities license is insufficient, and advisors must continually further their industry education and knowledge through regular continuing education courses. In addition, it is unethical for an investment advisor to present himself as knowledgeable and experienced with respect to those types of products and services with which he has no training or exposure.
Protection of Client Data
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All investment advisors must adhere to a strict set of industry regulations regarding the protection of client data and personal information. Clients' private details are to be securely stored in a locking file cabinet to which unauthorized persons do not have access. Those advisors who employ support staff must maintain adequate oversight of their access to client files to ensure proper handling of confidential information, and all staff must also acknowledge and sign non-disclosure documents. Information contained within client files may not be used for any purpose other than providing those services requested by the clients, nor may private details be transmitted to or shared with other organizations or institutions without express written permission.
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Suitability of Recommendations
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Recommendations regarding the allocation and placement of client funds must be appropriate and suitable for each individual's situation. Investment advisors are prohibited from making blanket recommendations to multiple clients without first ensuring that those suggestions fit within the confines of each client's investment goals and time horizon. Investment advisors must take the time to establish a detailed profile of each client before making recommendations and allocation suggestions to avoid inappropriate dissemination of funds in a manner that could threaten the client's financial stability.
Timely Implementation and Response
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Due to the sensitive nature of the financial industry and the speed with which certain types of investments can change in value, an investment advisor must make a reasonable effort to respond to client inquiries and trading instructions in a timely manner. While no formal regulation exists regarding the delay between a client's inquiry or request and the time it takes for the advisor to react, industry guidelines typically consider a response within 24 hours to be sufficient.
Regular Performance Reviews
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The investment advisor code of ethics requires regular performance reviews of client accounts. Advisors are responsible for appropriate oversight of the accounts they manage, and must consistently examine the performance of portfolios in their charge to ensure that the securities and allocation are still appropriate. Meetings with clients must be held at least annually to review account performance and document any potential changes to goals or timelines. Clients who decline these annual review appointments must be mailed a report or other summary documentation containing the advisor's analysis of account performance and suitability.
Non-Public Information
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The nature of an investment advisor's position has the potential to put him in receipt of non-public information regarding actively traded securities. It is against the investment advisor code of ethics to act on private non-public information for trading purposes, or to transmit such information to others with the same intentions. Severe civil and criminal penalties may be imposed on investment advisors or other financial industry professionals who are convicted of utilizing non-public data for personal financial gains.
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