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Ethical Standards You Should Expect from Financial Advisors

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Financial advisors are the guardians of your hard-earned money. They manage your assets and all matters related to money while enabling you to holistically plan for your financial future. Today, hiring a financial advisor is extremely easy and simple. However, with so many options to choose from it can be hard to pick an advisor who is best suited to your needs. The ideal way to assess the suitability of a financial advisor is to understand if they follow appropriate ethical standards. Good ethics are an important aspect of a competent financial advisor. Hence, when hiring an advisor, be careful to understand their ethics and values and make an informed choice.

Here are some ethical standards you can expect from a financial advisor:

Fiduciary standard for ethical financial planning:

For a secure financial future, it is advisable to hire a financial advisor who places your interest before their own and offers you genuine advice. This is possible when the professional follows a fiduciary standard. A fiduciary financial advisor is a professional who is governed by a fiduciary duty to place your needs before their own. These advisors provide you with an assurance that your money is in good hands because they are governed by an ethical code of conduct. Fiduciary advisors take a lawful pledge to act in your best interest at all times. Hence, the monetary counsel they offer is in-depth, accurate, and ideal as per your requirements. These advisors make every effort to work in your favor, minimizing any disputes and ensuring transparency. Moreover, fiduciary financial advisors do not use your assets for their benefit. They receive direct payments from you and do not earn any commissions for the financial products they sell to you. In case a fiduciary advisor violates the fiduciary duty, you can take legal action (financial and civil) against the professional. Generally, a fiduciary relationship is breached when the advisor fails to honor the set obligations, such as making unnecessary transactions to earn more commission, misrepresenting or false representing of facts, engaging in an unauthorized trade, negligence in trading leading to a loss, etc. That said, the best way to know if your advisor is a fiduciary or not is by checking their registrations.

Generally, an advisor registered with the U.S. Securities and Exchange Commission (SEC) or state securities regulator is governed by a fiduciary duty. You can also select a financial advisor that holds either of these designations:

  • Certified Financial Planners (CFPs)
  • Chartered Financial Consultants (ChFCs)
  • Accredited Investment Fiduciary (AIF)

  • Professionals with these designations are bonded by a fiduciary duty and follow ethical standards in financial planning. All other professionals, like stock-brokers, dealers, insurance agents, etc., only conform to a suitability standard and do not necessarily offer ideal advice as per your requirement. You can also use online tools like WiserAdvisor's advisor match tool to find a fiduciary advisor. The tool uses complex algorithms to match you with pre-screened financial advisors in your area. The recommendations offered by the tool are given after a careful analysis of the experience, compensation arrangement (fee-based or fee-only), and licensing and disclosures of the financial advisor.

    Integrity to ensure transparency in financial decisions:

    It helps to choose a financial advisor who values integrity. The objective here is to find someone who can ensure honesty and candor and is not driven by individual gains and advantages. This does not imply that your advisor must conform to all your opinions and ideologies. A financial advisor can also have legitimate differences of opinion with you or even make an honest mistake. However, they must have earnest reasons for a disagreement and a sincere explanation for the errors they commit. A credible advisor would take responsibility for their actions, place your needs above their own, offer accurate advice as and when you need it, be honest and transparent about their beliefs, and respect your views. They will never use any scheme to commit fraud or make any untrue or false statement of a material fact.

    Competence and diligence to offer financial guidance:

    A financial advisor can only live up to the ethical standards of offering sound advice if they are competent enough to do so. Hence, when evaluating the ethical standard of a financial advisor, you should also make an effort to determine their level of competence. Try to find out if the concerned individual has relevant knowledge and skills that can contribute to your growth. If the person is not equipped to provide you with the required professional guidance, the financial advisor should inform you in advance before the engagement begins.

    Besides being competent at their work, a financial advisor must also respond to your queries and inquiries in a timely and thorough manner. To ensure you select a competent and diligent advisor, it may be advised to hire a person with suitable experience, calibre, certifications, and designation. The ideal case would be to engage with someone who is purely regulated by SEC. But an advisor, who is partially or wholly regulated by FINRA (The Financial Industry Regulatory Authority) can also be an option. Alternatively, you can consider a CFP (Certified Financial Planner) who is regulated by a fiduciary duty even if they are not FINRA compliant. Other credentials you can check for in a financial advisor are Personal Financial Specialist (PFS), Chartered Financial Consultant (ChFC), etc.

    Transparency of business practices for unbiased advice:

    A good financial advisor should disclose all possible material conflicts of interest that could affect their professional relationship with clients. For this purpose, the advisor can share specific facts that can help you understand common conflicts and business practices that can lead to disagreements. It is important for both parties – you and the financial advisor – to offer consent, either eliminate the root cause of the issue and find a mutually beneficial way to end the dispute. If your advisor has not taken the right steps in this direction, you might want to discuss it or think of a rearrangement. Further, your advisor should also disclose their compensation method and fee structure. Typically, all financial advisors follow either of these two methods:

    • Fee-based: A fee-based financial advisor is a person who receives both fees and a commission from the financial products you buy through them.
    • Fee-only: Alternatively, a fee-only financial advisor is a person who receives compensation for their services with no sales-related commission.

    Even though you can choose any of the two compensation mediums, it may be helpful to opt for a fee-only advisor as these advisors are more inclined to work to your advantage. They have no personal motives from a financial transaction and can offer you unbiased advice. That said, the choice is entirely yours, and the overall objective here is to understand if your advisor is transparent in their fee-charges, disagreements, conflicts, and more.

    Professionalism and experience in offering financial services:

    A competent financial advisor will always follow the utmost level of professionalism in their engagement. They will not only be open and welcoming for queries but also ethical when it comes to offering financial advice. An experienced financial advisor would treat clients, potential clients, colleagues, and all other stakeholders with dignity, courteousness, and respect.

    Moreover, a financial advisor’s actions must comply with the law. The professional should be aware of the financial laws, rules and regulations governing professional services, and must not intentionally or recklessly participate or help another person violate these standards.

    Confidentiality and privacy to protect your financial information:

    The most important ethical standard you should expect from your financial advisor are confidentiality and privacy of matters. An ideal professional will not disclose any of your personal financial details or other personal information. Besides, you should also be wary of someone who discloses any such information about a past client or another prospective client. Any such act indicates that your advisor is capable of doing the same to your data. That said, if the professional does reveal any information for business purposes, it should be with your consent.

    In some cases, the advisor may have to send relevant details to your attorney, accountant, legal representative, and auditor for various financial planning tasks. But this should again be with your approval. In no circumstance should the advisor use your personal information for their direct or indirect benefit. Instead, the professional must take reasonable steps to ensure complete protection of your financial details - physically and electronically.

    Apart from assessing if your financial advisor follows the above-mentioned ethical standards, it is good to be aware of these specific signs that send out warnings of an unethical financial advisor:

  • Changing the way of reporting financial performance to cover up poor outputs or with the intention of fraud.
  • Pushing a financial product or transaction too hard without any substantial justification for the sale or purchase of the concerned product.
  • Flashy and unreasonable claims regarding the performance of an investment portfolio.
  • Making strong future predictions regarding financial aspects such as interest rate, government policies, etc.
  • Spending more time advertising than offering sound advice or taking necessary steps to improve returns.
  • Making panic-based decisions instead of adopting a comprehensive investment approach.
  • Evading financial questions or not being open to investment-related queries.
  • Using incomprehensible jargon that is too complicated for you to understand.
  • Using inappropriate benchmarks to compare financial performance or failure to deliver performance as per standard benchmarks.
  • Producing fake or false credentials and certificates or having any records of disciplinary actions.

  • In the modern world, an ethical financial advisor is a person who precisely makes you understand what they are doing and why, with complete knowledge of the costs and risks involved. In this regard, their sole purpose is to comprehend your expectations and deliver accordingly while mutually benefitting from the association. An ethical relationship is one where you know your advisor thoroughly on the professional front, agree with their method of functioning, choose to rely on them, and understand the ramifications of their recommendations.

    To sum it up

    A financial advisor holds the strings of your financial future. Hence, it is advisable to engage with a professional that follows good ethical practices. Ideally, your advisor should give honest financial advice and investment opinions, keeping your goals a priority. Moreover, they should enable you to achieve your financial objectives and targets, such a retirement planning, tax minimization, debt reduction, estate planning, and more. When it comes to your money, choose someone ethical and trustworthy. When you make an informed choice, you have a higher possibility of making the most of your money.

    Hence, good ethics are an important aspect when you select a professional financial advisor who understands your financial, personal, and professional situation, future goals, risk appetite, etc. to help secure your financial future.

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    The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
    A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.