BUSI 489 Week 7 Discussion Board Forum 2 Example

Discussion Board Forum 2: Ethics, Conflicts of Interest and the Financial Planner

BUSI 489 Capstone in Financial Planning, Discussion Board Forum 2 Thread and Replies

Thread by [Student Name]

The forum topic, the writer's bank experience and the classmates are composites; the textbooks, the research and the Scripture cited are real.

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Before I studied financial planning, I worked at the teller line and later the customer service desk of a regional bank. Each quarter the branch had goals for opening new accounts and selling certain products, and we were praised in meetings when we hit them. I remember an older customer who came in to move money from a maturing certificate of deposit. My manager suggested I mention an annuity the bank was promoting that quarter. The customer needed access to the money within a year for a home repair, and the annuity had surrender charges that would have cost her if she withdrew early. I told her about the surrender charges, and she kept the money liquid. The branch missed a little of its goal; she kept her money.

In miniature, that afternoon posed the same question this forum asks. Lytton et al. (2012) describe the financial planning process as beginning with understanding the client's situation and goals and moving through analysis to recommendations that serve those goals, and Grable et al. (2012) emphasize that ethical standards require planners to put the client's interests first. A conflict of interest arises whenever what pays the planner best is not what serves the client best, through commissions, sales goals or proprietary products.

The duty matters because the problem is real. Egan et al. (2019) combed through regulatory records covering American financial advisers; roughly 7 percent carried a past misconduct finding. The misconduct clustered among repeat offenders and at particular firms, and many advisers disciplined for it soon found work at another firm. Clients cannot easily tell a careful adviser from a careless one, so the planner's own commitment to the client is often the only safeguard.

Three practices help me think about conflicts. First, disclose them plainly, in writing, before making a recommendation. Second, show the client the alternatives, including the ones that pay the planner nothing. Third, document the reasons for each recommendation in terms of the client's goals, which is exactly what the targeted plans in this course require.

Jesus said that no one can serve two masters (English Standard Version Bible, 2001/2016, Matthew 6:24). A planner who serves both a sales goal and a client will eventually have to choose. Choosing the client is the only choice that fits a Christian view of work as service.

Reply to Brooke

Brooke, you argued that the answer to conflicts of interest is simply to require all advisers to be fee-only fiduciaries, so that no one is paid to sell products. I agree that removing commissions removes one temptation, and your experience with a relative who was sold a high-fee variable annuity shows the cost of the current system. Research suggests, though, that unbiased advice is not enough on its own. Bhattacharya et al. (2012) studied a large German brokerage that offered its customers free, unbiased investment advice. Few customers accepted the offer, and those who did often did not follow the recommendations, so their portfolios improved only modestly. Inderst and Ottaviani (2012) review the economics of financial advice and note that conflicts of interest are only part of the problem; how clients understand and act on advice matters too. That suggests the fiduciary standard should be paired with the kind of clear, goal-based communication our comprehensive plans require. Grable et al. (2012) stress that a plan only helps if the client implements it. In my bank job, the customers who most needed help were often the ones least able to pay for a planner by the hour, which makes me wonder about access. Do you think the fee-only model would reach the clients who most need advice?

Reply to Marcus

Marcus, you wrote that trust is the most important asset a planner has, and that your father has kept the same adviser for twenty years because he trusts him. I agree that trust makes planning possible: clients will not share their full financial picture, or follow difficult advice, without it. Gennaioli et al. (2015) offer a model of financial advisers as "money doctors" whose clients delegate investment decisions because trust reduces their anxiety about risk. In their model, that trust allows advisers to charge higher fees and lets clients take more risk than they would alone, which can benefit clients but also leaves room for advisers to overcharge. Trust, in other words, is both the foundation of the relationship and the reason the relationship needs safeguards. Proverbs 11:3 says that integrity guides the upright, while crookedness destroys the treacherous. The planner's integrity is what makes a client's trust safe. One practical safeguard is an annual review in which the adviser shows all fees in dollars and compares the portfolio with a simple low-cost benchmark, which keeps trust honest without ending the relationship. Has your father ever compared his adviser's fees with those of other options, or is that a conversation the trust makes awkward?

References

Bhattacharya, U., Hackethal, A., Kaesler, S., Loos, B., & Meyer, S. (2012). Is unbiased financial advice to retail investors sufficient? Answers from a large field study. The Review of Financial Studies, 25(4), 975-1032. https://doi.org/10.1093/rfs/hhr127

Egan, M., Matvos, G., & Seru, A. (2019). The market for financial adviser misconduct. Journal of Political Economy, 127(1), 233-295. https://doi.org/10.1086/700735

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Gennaioli, N., Shleifer, A., & Vishny, R. (2015). Money doctors. The Journal of Finance, 70(1), 91-114. https://doi.org/10.1111/jofi.12188

Grable, J. E., Klock, D. D., & Lytton, R. H. (2012). The case approach to financial planning: Bridging the gap between theory and practice (2nd ed.). The National Underwriter Company.

Inderst, R., & Ottaviani, M. (2012). Financial advice. Journal of Economic Literature, 50(2), 494-512. https://doi.org/10.1257/jel.50.2.494

Lytton, R. H., Grable, J. E., & Klock, D. D. (2012). The process of financial planning: Developing a financial plan (2nd ed.). The National Underwriter Company.