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ETHICALLY SPEAKING Addressing the issues of Moral Hazard and Conflicts of Interest in the Financial

Planning Community and Elderly Clients

MARCH 11, 2017 WRITTTEN BY DAVID WAGNER

FIN 6350 Assignment 2 Dr. De’Armond

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David Wagner FIN 6350 Assignment 2 Dr. De’Armond

Introduction Given the personal nature of being a financial advisor, an advisor is privy to a great deal of

sensative information pertaining to his or her clients. This is sometimes information that may

present a conflict of interest for the advisor. It is not always the construct of the financial plan

itself that manifests its complexity, but the social, familial and marital circumstances of the client

may lend unmanageable complexity to the advisor/client relationship itself. These conflicts

surface both as a result of client attitudes and behavior as well as those of the advisor. Anne

Federwisch of Santa Clara University-Markala Center for Applied Ethics cites Ronald J. Duska’s

(American College) five principal conflicts that advisors face in the course of their work with

their clients which include:

(1) “Self interest sometimes morphs into greed and selfishness”. This where an advisor has

unchecked avarice regarding his or her dealings with the client.

(2) “Some people suffer from stunted moral development”. Three reasons for this mentioned by

Duska are the failure to be taught, failure to look beyond one’s own perspective, and poor or no

mentoring.

(3) “Some people equate moral behavior with legal behavior”. This is where legal behavior may

not pass moral muster in spite the legal correctness of the action.

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David Wagner FIN 6350 Assignment 2 Dr. De’Armond

(4) “Professional duty can conflict with company demands”. A classic example is the Wells

Fargo debacle involving the opening of unauthorized accounts for clients to meet sales demands

from upper management.

(5) “Individual responsibility can wither under the demands of the client”. Clients who ask

agents or advisors to falsify applications or claims documents are a prime example in this case.

Each of these dilemmas faced by advisors are based on the frailty of human nature. Where this is

true and present in the financial services culture among others, one can also say that Duska’s

explanation of these issues posed in the form of human nature flaws may seem enabling and

ignore the tenants of strong moral character which should be a requirement for any trusted

advisor (Federwisch 2006). The number of moral conundrums in the financial services industry

are far too great to remain within the scope of this paper. An area that is one of the most

prevalent in the financial services industry deals with the abuse of the elderly clients. This paper

will focus on where advisors will need to understand the rights, responsibilities and dynamics

between stakeholders regarding their involvement in financial or estate planning business

activities with elderly clients. This paper will also examine the particular areas that demand due

diligence on the part of the planner with respect to the benefits and risks of action taken on

behalf of elderly clients and what actions the industry is taking or should take in safeguarding the

trust of elderly clients.

Detection Detecting and identifying problematic issues with elderly clients can be a trying task because the

delineation between unethical behavior, unsound judgement, and just being unaware can

sometimes blur. For example, a saavy financial planner who understood that high dividend

stocks and bonds are the mainstay of a post retirement portfolio circa 2006-7 might have

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David Wagner FIN 6350 Assignment 2 Dr. De’Armond

believed that Collateralized Debt Obligations (CDOs) underwritten by the likes of Bear Stearns,

Lehman Brothers or Saloman Brothers were a safe bet due to the then reputation of these firms

and that the payout of these securities were a sure thing. Was the planner malicious or

negligent? Should the planner have known these firms were burying and embedding junk

mortgages in with the AA or AAA mortgages (Denning 2011, Bearden 2015)? The answer is no

because the entirety of the financial services sector, particularly at the ground level, did not know

until it was too late. This is not to say “unwitting” or “unknowing” an innocent planner makes.

There are frequent instances of predatory practices to which elderly clients fall victim. In

between innocence and avarice lie a host of factors that make the elderly client space difficult to

navigate. Detecting problematic issues with elderly clients may also stem from incomplete

information given the planner, the planner not asking enough or the right questions, the client not

being coherent enough to be forthcoming with essential information to factor into his or her plan,

and even familial influences may play a role in distorting the true picture needed for an accurate

plan. The Financial Planning Association in conjunction with AARP mention that good

questioning techniques in combination of good listening skills are vital in providing a truly

professional service to their clients. At times, it will be the planner who notices first the subtle

changes in the clients ability to perceive, participate and determine the direction of the planning

process from their vantage point. A study by the MetLife Mature Market Institute in 2009

indicates that “trusted professionals”, a group that typical includes attorneys, financial

professionals along with other fiduciaries are the top source of elderly abuse. In 2001, The FBI

reported to Congress that older Americans are targets of fraud for five principle reasons which

include:

1. Older clients having more assets (paid for home, excellent credit, more savings, etc.).

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2. Social mores of the period of the 1930’s to the 1950’s strongly advocatd politeness

and trust.

3. Defrauded older clients tend not to report out of embarrassment or not knowing

where to report the fraud.

4. If the criminals are brought to trial, many older victims make poor witness due to

alleged or actual memory loss.

5. Simply being the main targets of scams and questionable products promising

“fountain of youth” results regarding their cognitive functions, anti-aging properties

and the like.

These problems are not restricted only to elderly clients. Other stakeholders in the financial

planning effort may or may not be on the same page as the planner. But who are the stake

holders? What rights and responsibilities does each have? (AARP & FPA 2016 , Ragatz 2016).

Stakeholders There many players involved in the financial planning process who have a vested interest in the

outcomes from any given financial or estate plan. These stakeholders may be directly involed in

the financial planning process (internal) or stakeholders whose circumstances will be impacted

by disposition of assets as a result of a financial or estate plan in progress or execution. Internal

stakeholders are generally clients, their families both immediate and extended, and at times,

business partners or stockholders. External stakeholders are typically the financial planning team

and the legal and financial institutions they are affiliated with. Whether stakeholders are internal

or external, each has certain rights and/or responsibilities in regard to the execution of a

financial or estate plan. An examination of the rights and responsibilities is afforded to each actor

of the financial or estate plan as follows:

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David Wagner FIN 6350 Assignment 2 Dr. De’Armond

1) The client(s): If clients (internal stakeholders) are consulting with a financial planner in

the first place, they are performing due diligence to the financial security of their loved

ones. To what degree may always fall into question due to a host of variables on whether

the client has done enough research to aid his choice of planner or other professionals

needed for the planning process. Financial Planning firms often make a statements

asserting consumer advocacy and maintenance the firm’s integrity in regard to their

interations of the clients. Rights afforded the client(s) come also in the form of federal

and state regulation. FINRA, the NASD, the SEC, the Sarbanes-Oxley Act of 2002, the

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and the

individual state boards of insurance among others all were created to protect the rights of

the consumer or the financial services client (Investopedia - definitions 2017). Afterall,

the client is the “quarterback” or “CEO” of his/her financial plan and is ultimately

responsible for the executive decisions on behalf of the client and plan meaning that the

client may hire,fire, stop or initiate any action he or she sees fit. The regulatory bodies

are there to monitor the behavior of the other actors and assist with the remediation of

any wrongs perpetrated by the professionals or institutions acting on the behalf the client.

2) The external stakeholders are the financial and legal professionals in particular typically

CFPs, Attornies, CPAs, Insurance Agents and Financial Instituions. They are not only

regulated and monitored by Federal and State oversight bodies but they also self-regulate

within their various professional boards and associations such as the CFP Board, ABA,

AICPA and the like. The cornerstone for all of the external stakeholders is fiduciary

responsibility to the client. Each has a legal as well as a moral responsibility to act in the

best interests of the client. How is this actually determined with empirical evidence

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qualitatively or quantitatively is a moving target making it difficult to ascertain (Bearden

2015).

Through the interactions of the stakeholders and their vested interest in a client financial plan,

conflicts of interest arise between internal stakeholders (clients and sometimes family members)

and external stakeholders (the professionals involved in plan implementation and execution).

Conflicts of Interests may also arise between the professionals within the external stakeholder

group. If members of a financial planning team are not all moving in the same direction in

accordance with client needs and the client’s best interest, then there is a likely conflict of

interest at play (Hopkins, Regata & Galli 2016, Bearden 2015). In spite the efforts of all parties

to strive for and enforce the notion of fiduciary propriety in relation to the client, there is ever

present moral hazard and the temptation to take advantage of weak internal stakeholders

especially in the case of the elderly client. Legal, Academic and Professional organizations

associated with the financial planning are engaged in constant discussion as to how to best

remedy problems of ethical breaches created by moral hazard.

Actions One of the first actions in performing due diligence to clients especially the elderly by financial

planning firms or teams is understand where conflicts of interests may exist and address them

(Bearden 2015). Setting a framework of tight policies and procedures are suggested to help

identify, monitor and control potential conficts of interest with guidance to keeping a best

interest of the client view. Getting an accurate picture of client objectives and a clear idea of risk

attitudes through careful questioning and observation would also help mitigate future problems

in the implementation and execution of a financial plan. This might include input from family

members in the case of elderly clients but with measured reservation while keeping the best

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interest of the client in mind first. Careful and full disclosure of financial planning activities will

likewise mitigate some future problems if the planner is sure that the client has a concise

understanding of what is taking place especially as it pertains to fees, commission and other costs

in promulgating a financial plan. All of these components should be put together with a view to

an effective service delivery model (Corelli & Piindyck 2016, Moren 2017).

Concluding Remarks Much more depth may certainly be offered on any or all of the topics covered in this paper hence

my discussion attempts to remain within the desired scope. The absolute best action to guard

against deception and moral hazard by financial professionals would come in the form of

education of the client him or herself. This would enable the client to make more discerning

choices about who gets involved in their financial plan and how it gets processed. The sort of

people who usually engage a planner typically have the motivation, direction, income and

education to accumulate enough wealth to plan with. Too often, the same people who are

financial planning clients are so specialized professionally themselves that they believe it

inconvenient to branch out knowledgewise in order to perform due diligence to themselves. This

a prevalent among doctors, engineers, executives and small/medium/large business owners.

Retired professionals or elderly clients need trustworthy guidance. That is why there is a need to

continue to encourage ethical and effective behavior within the financial planning industry to

promote utilization of professionally offered services by clients, elderly or otherwise.

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References: AARP and the Financial Planning Association. (n.d). A Professional Guide to working with

Older Clients. Retrieved 26 Feb 2017 from AARP.

http://www.aarp.org/content/dam/aarp/money/how_to_guides/2011-

08/Financial%20Professional%20Guide%20Working%20Older.pdf

Bearden, Frank. (2015). A Study of Recognizing Conflicts Pending Financial Planning

Engagements. Retrieved 26 Feb 2017 from WTAMU Library.

http://eds.b.ebscohost.com.databases.wtamu.edu/eds/pdfviewer/pdfviewer?vid=1&sid=3b763bfa

-3d2c-45ae-a2ac-3a4e88fa3265%40sessionmgr103&hid=117

CFP Board. (n.d.) Ethics and Enforcement. Retrieved 8 Mar 2017 from the CFP Board.

http://www.cfp.net/about-cfp-board/ethics-enforcement

Corelli, J.& Pindyck-Constanino, S. (2016). How to deal with Conflicts of Interest. Retrieved 26

Feb 2017 from Pepper Hamilton LLP- Power of Intelligence.

http://www.pepperlaw.com/publications/how-to-deal-with-conflicts-of-interest-2016-04-05/

Denning, Steve. (2011). Lest we forget: Why we had a financial crisis. Retrieved 8 Mar 2017

from Forbes-Leadership.

https://www.forbes.com/sites/stevedenning/2011/11/22/5086/#536940578f92f.

Hopkins, J., Ragatz, J., & Galli, C. (2016). Ethical Issues in Financial Planning: An Advisors

Perspective. Retrieved 6 March 2017 from The American College of Financial Services.

http://ethics.theamericancollege.edu/sites/default/files/Ethical_Issues_in_Retirement_Income_Pl

anning.pdf

Ivestopedia. (n.d.) Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Retrieved 26 Feb 2017 from Investopedia. http://www.investopedia.com/terms/d/dodd-frank-

financial-regulatory-reform-bill.asp

Investopedia. (n.d.) Financial Industry Regulatory Authority- FINRA. Retrieved 26 Feb 2017

from Investopedia. http://www.investopedia.com/terms/f/finra.asp

Investopedia. (n.d.) National Association of Securities Dealers-NASD. Retrieved 26 Feb 2017

from Investopedia. http://www.investopedia.com/terms/f/finra.asp

Ivestopedia. (n.d.) Sarbanes-Oxley Act of 2002. Retrieved 26 Feb 2017 from Investopedia.

http://www.investopedia.com/terms/s/sarbanesoxleyact.asp

Investopedia. (n.d.) Securities Exchange Commision-SEC. Retrieved 26 Feb 2017 from

Investopedia. http://www.investopedia.com/terms/s/sec.asp

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Moren, Patricia. (2017). Delivering Client’s Best Interest Require and Effective Service Model.

Retrieved 8 Mar 2017 from WTAMU Library.

http://eds.b.ebscohost.com.databases.wtamu.edu/eds/pdfviewer/pdfviewer?vid=5&sid=3b763bfa

-3d2c-45ae-a2ac-3a4e88fa3265%40sessionmgr103&hid=117