Introduction to Ethics in Investment | CFA Level I Portfolio Management

Welcome to our first topic on ethics and trust within the investment profession. We’ll cover the definition of ethics, the necessity for high ethical standards, and the challenges faced in maintaining ethical behavior in the industry.

Defining Ethics

Ethics can be described as a set of shared beliefs about good or bad behavior. Ethical conduct follows moral principles, balances self-interest with the impact on others, and benefits society. An action is considered ethical if it leads to improved outcomes for affected stakeholders, such as clients, coworkers, employers, and the investment profession.

Significance of Ethics

Ethics are emphasized by the CFA Institute due to the substantial impact professionals’ actions have on clients, the investment profession, and society. Investment professionals have a unique responsibility as they are entrusted with clients’ wealth, making strict ethical standards crucial.

Unlike tangible products, the quality of intangible services like investment advice is harder for consumers to evaluate. Trust in investment professionals is therefore critical, and when broken, it can affect the entire industry.

Unethical behavior can negatively impact society by raising the cost of financing for firms, misallocating capital, and reducing economic growth. This, in turn, affects the wellbeing of society as a whole.

Challenges in Maintaining Ethical Behavior

Despite the importance of ethical standards, violations persist in the financial services industry. Overconfidence, situational influences, and excessive rules and compliance procedures can all contribute to challenges in maintaining ethical behavior.

Overconfidence and Internal Traits

People tend to believe they are more ethical than others, focusing on internal traits and intrinsic motivations. However, studies have shown that these traits are generally not the main determinants of ethical behavior in a given situation.

Situational Influences

External factors, like environmental or cultural elements, are more influential in determining ethical behavior. In finance, money and prestige are common situational influences that can encourage unethical behavior. Loyalty to supervisors or employers can also lead to ethical compromises.

Excessive Rules and Compliance Procedures

Paradoxically, having too many strict rules and compliance procedures can challenge ethical behavior. When organizations focus on following rules instead of ethical principles and long-term results, violators may become bolder, believing they won’t be caught as long as they meet the required checkboxes.

Conclusion

This introduction to ethics and trust in the investment profession highlights the importance of ethics, the challenges in maintaining ethical behavior, and the consequences of unethical actions. In the next part, we’ll delve into the framework for making ethical decisions.