Innovation in Financial Advising: Where Does Ethics Come In?

Finance raises a handful of familiar ethical questions: When is disclosure required, of what, and to whom? When is a financial professional acting in a fiduciary capacity, what duties attach to that capacity, and to whom are those duties owed? When do financial professionals find themselves in a conflict of interest, what can be done to avoid these conflicts, and what should be done when they are unavoidable? The linked piece is interesting, in part, because it raises these and other questions as they arise in novel circumstances created by new technology and innovative business models in financial advising: How does automated investment advice fit into the fulfillment of a financial advisor’s fiduciary obligations? How do innovative compensation structures (for example, subscription models displacing fees scaled to assets under management) raise challenges to regulating financial advisors and identifying correctly (un)ethical practices? Lots of fodder for discussion of the ethical aspects of changing conditions in financial advising.


LINK: For Squeaky Clean Advisors, Ethics And Attitude Work Together (by MOREY STETTNER for Investor’s Business Daily)

Yet because the financial planning industry is not static, ethics rules must adapt to meet ever-changing conditions. Part of the problem is that advisors may or may not be considered fiduciaries. Under the revised DOL fiduciary rule, advisors’ status depends on the financial products or the financial advice that they deliver. …

What’s more, innovations such as automated investment advice can reshape the advisor-client relationship. This creates new opportunities along with potential pitfalls. Consider technology tools, which advisors are increasingly offering clients. In offering online portals that enable clients to track their portfolio 24/7, pressures can mount as investors seek market-beating performance. …

“Some state regulators have issues with certain fee models,” [University of Southern Maine finance professor Derek] Tharp said. “They may try to fit everything under a traditional AUM (assets under management) model. If an advisor has a subscription fee model, some states may convert whatever the dollar amount is into an AUM fee, and that fee may then be deemed excessive for individuals without a large portfolio to manage. Or states may set arbitrary maximums. If an advisor wants to charge $300 an hour, a state may say any fee over $150 an hour is unreasonable. These practices can hamper industry innovations in developing more transparent fee models.”

What do you think?

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