Sunday 17th July, 2005


Principles of fairness

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All the rain reminds me of a story about an old woman who lived on the hillside in the time of Prophet Noah, who did not board the Ark. After the flood, she was still living there. When asked how she had managed during the flood, she looked at the questioner in amazement and asked “what flood?”

We’ve been addressing the question of professionalism and ethics over the past three weeks, and one of my readers accosted me with the questions: “Ethics? What ethics?”

No doubt her experience had been an unpleasant one, and she didn’t think that ethics was something we were guided by. But it is! Here are some of the international guidelines.

Financial planning professionals have a responsibility to the public, to clients, to colleagues, and to employers. When a designation is awarded to the professional, there is usually a code of ethics, administered by the board of governors for the designation, to which the individual must subscribe, which speaks to these responsibilities.

Commonly, the codes will address certain principles, and these will be governed by written rules. For example, the CFP (Certified Financial Planner) designation is guarded by seven principles of ethics. These are the high standards to which we must aspire.

The principles are: integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence.

These are vague terms, but the rules clearly define the expectations of the buying public. With respect to integrity, rule 101 says that a CFP designee “shall not solicit clients through false or misleading communications or advertisements” that create unjustified expectations in the client.

In addition, the individual cannot make misleading statements about his own competence in the practice.

Rule 102 states that the planner “shall not engage in fraud, deceit, or knowingly make false statements” to anyone including government.

There are also rules regarding the receipt of funds from clients. For example, there can be no commingling of funds. This means that a financial advisor cannot mix his money with that of the clients.

Competitive practices

In addition, monies received by planners must be turned over to the provider or investment company or insurer, as soon as possible.

Areas where there are conflicts of interest must be declared. All risks must be expressed, and all matters concerning the client remain confidential at all times.

Of significance, too, is the requirement that planners engage in fair and honourable competitive practices.

Clients also have the ability to play one company against another or one agent against another, in jockeying for rates of return, and sometimes the competitive war results in a kind of “institutionalising” of an “uneven playing field,” and sometimes aided and abetted by the institutions themselves.

On the issue of diligence: that refers to the requirement to accurately establish that there is a match between the needs and objectives of the clients, his risk tolerance, and the prescribed investment.

Of utmost importance is the imposition of the ideals of truth and honour in the entire practice of financial planning.

In the story of the old woman on the hillside, it is said that she was among the most truthful persons of her time, whose life and property had been saved from the flood by the angels.

The buck stops with us, you and I, it’s the ideal of truth! Indeed, there is an old scripture which invites us to “travel through the earth and see what was the end of those who rejected truth.”

Next week we continue with the 14 steps.

n Raziah Ahmed is a registered financial consultant.

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