Blue Chip Issue 78 - Jan 2021

ETHICS
(often material) interests. As financial products and advice are
intangible and due to the asymmetry in the client-planner
relationship, clients must trust that the advice they are receiving
is unconflicted and in their best interests. Although there are
manageable conflicts present in the relationship, they are lowertier
conflicts that do not impair professional judgement. They arise
regularly and merely require a refocus of attention and effort to
overcome and maintain sound professional judgement. Therefore,
a conflict only becomes unethical when it negatively influences
the professional judgement of a financial planner and damages
the interests of a client.
Although our rational, thinking brains believe that our
professional judgement is always unbiased, conflicts are an
inherent part of any profession and all professionals are influenced
by subtle psychological factors. Decision-making, when conflicts
are present, is subconscious and is based on both emotion and
cognition (the ability to think). Although we think our decisions
Decision-making, when
conflicts are present,
is subconscious and
is based on both
emotion and cognition
(the ability to think).
are made based on rational thinking, the
reality is that our emotions often distort our
judgement. We are genetically primed to put
our interests (and those of people closest to us)
before the interests of others – this is known as
our self-serving bias and is usually based on our
emotions. To avoid the influence of this bias, we
need to use our rational, thinking brain; however,
this takes thinking work and energy. Without conscious awareness
of this bias or a tendency towards it, planners can easily fall prey to
the unconscious influence of a COI without realising it.
To manage their self-serving bias, a planner will rationalise their
conduct. When making a compromised decision, they construct
self-serving explanations for their actions, insisting they are doing
their job, or that the product they recommended is in the client’s
best interests (subtly ignoring the commission or fees received)
or that they acted under their professional obligations. It can be
challenging for a planner to be objective and to take responsibility
regarding the influence of a conflict. The opposite is true: they find
it easy to persuade their brains that they acted in their client’s best
interests even when the evidence is stacked against them.
This form of self-deception is not a matter of lying to oneself;
it consists of the unexamined acceptance of a belief that is
dubious to an objective outsider. Another psychological factor
Lee Rossini CFP®, Co-Author,
SA Financial Planning Handbook
that may be present in COI situations is ethical fading. This occurs
when moral issues are pushed into the background or even
removed from the decision-making process and business or
personal issues are pushed to the fore, for example, when faced
with the pressure to meet business targets or pay bills.
Unfortunately, the self-regulatory mechanisms that govern
moral standards do not operate unless they are activated, and
hence a planner may not view a COI as a moral dilemma. Many
psychological processes are used to selectively disengage from
moral self-sanction in a process known as moral disengagement.
This is not a sudden process as it creeps up on the person and
gradually erodes any self-imposed sanctions. Moral disengagement
includes planners minimising, distorting and denying the harm
that flows from being influenced by a conflict.
Clients are dehumanised and blamed for making the wrong
financial decisions while planners justify the conflict and obscure
their accountability. Currently, disclosure is used to manage COIs
and in a perfect world filled with rational
people, it would be an effective remedy.
However, research shows that disclosure can
have the opposite effect. The rationale is that
if a conflict is disclosed to a client, they should
consider it when making their financial
decisions. However, even if the potential
conflict is pointed out or disclosed, clients
do not necessarily discount the conflicting
advice as they are willing to overlook it
based on the trust they have in their planner.
Furthermore, planners may give even more
biased advice because they have disclosed
the conflict to their client.
In summary, COIs are not only associated
with intentionally self-interested financial
planners but also with well-meaning
professionals who succumb to the unintentional
psychological factors at play.
Due to the complexities in the financial
services environment, conflicts are on the increase and they
cannot be avoided. To ensure they do not damage their
relationships with clients, planners should be aware of the
subconscious factors underpinning COIs, and that they need to
be managed appropriately. Clients rely on their planners for
unbiased advice that is in their best interests. Therefore, taking
on the mantle of being a professional includes making moral,
independent, objective and impartial decisions that transcend
all self-interest.
References:
Sah, J. Conflicts of Interest and Disclosure, Research Paper, Cornell
University [2018]. Commissioned by the Royal Commission into
Misconduct in the Banking, Superannuation and Financial Services
Bearden, FC. The Subtle Influence: Conflicts of Interest in Financial
Planning. iUniverse Inc. [2010].
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