19. Ethical Issues

Ethics in Investment Advising

Investment advisers play a crucial role in providing financial advice to their clients. It is important that this advice is based on ethical principles and is in the best interests of the client. This note aims to highlight the importance of ethical behaviour in the investment advisory industry.

What are Ethics?
Ethics can be defined as a set of moral principles that guide behaviour. It deals with what is good for society and individuals. Ethical behaviour is essential in the financial industry to build trust and confidence.

Fundamental Ethical Principles:
Honesty, fairness, diligence, care, and respect for others are widely acknowledged fundamental ethical principles. These principles provide guidance for behaviour when it affects others.

The Role of Investment Advisers:
Investment advisers have a duty to ensure that the right advice is given to their clients, so that all required laws and regulations are followed. It is important to note that ethical behaviour goes beyond legal behaviour. Investment advisers must prevent any illegal acts and uphold ethical principles, even when laws and regulations fall short.

Violations of Ethical Principles:
Investment advisers who fail to provide necessary after-sales services to their clients are violating ethical principles. Such actions may be legally justifiable when preventing illegal acts, but it is important to note that ethical principles must be upheld regardless.

Importance of Ethical Conduct in Business

  • Business exists to make profits for its stakeholders, but it should also consider the bigger picture and operate ethically.
  • Ethical conduct is necessary to earn the respect and trust of society.
  • Investment advisers have a unique responsibility to uphold the highest ethical standards due to the nature of their business.


  • Client First Principle: Investment advisers must prioritize the interests of their clients above their own.
  • Trust: Building and maintaining trust is crucial for the success of an investment adviser.
  • Fairness: Business must be conducted fairly without harming others.
  • Proactivity: Investment advisers should proactively suggest ways to benefit their clients.
  • Confidentiality: Investment advisers must be trusted with confidential information to provide the best advice.
  • Reputation: Ethical behavior leads to a good reputation and attracts clients who value ethical behavior.
  • Role model: Investment advisers must strive to be role models by conducting business ethically.

Ethical Issues for Investment Advisers:

Financial intermediaries play a vital role in channelling domestic savings into investment vehicles available in the market. While helping investors obtain reasonable returns, the intermediary should also ensure that the products they recommend serve the needs of the investors best and help in fulfilling their financial goals.

To ensure ethical practices, investment advisers should:

  1. Focus on understanding client-specific situations or needs to provide appropriate advice.
  2. Have an in-depth understanding of the financial product being sold, including the risks involved and suitability for the client.
  3. Stay informed about the overall market and other available financial products to provide relevant and comprehensive advice.
  4. Avoid wrong practices like frequent switching from one product to another to increase earnings from commissions (churning).
  5. Inform the investor about the risks and uncertainties associated with the product, not just the good features.
  6. Provide excellent after-sales service and stick to the commitments made to the investor.

Ethical Dilemma:

I. Definition of Ethical Dilemma
A. Problematic situation where a person has to choose between two equally undesirable alternatives
B. The chosen option reflects the ethical standards of the decision-maker
C. Signals sent out can impact client perception of an investment advisor’s ethics
D. Examples exist in every field, particularly prevalent in investment advising

II. Categories of Ethical Dilemmas
A. Pure ethical dilemma
1. Both options violate ethical principles
2. Example: Signing up too many clients without ability to serve them vs. building up business slowly
B. Clash between personal and professional values
1. Example: Promoting higher commission products vs. personal belief in only promoting term insurance policies

III. Resolving Ethical Dilemmas
A. Deeper analysis to find a clear course of action
1. Helps resolve dilemma and provide clarity for the decision-maker
B. Application of specific principles
1. Prioritizing the highest good for all involved
2. Doing the least amount of damage
C. Reconsideration of the problem in a different way to find new solutions

IV. Examples of Ethical Dilemmas in Investment Advising
A. Pushing underperforming mutual funds for higher commission
B. Pushing aggressive products to older clients when not suitable
C. Recommending unnecessary services to earn revenue

V. Importance of Ethical Decision-Making
A. Maintains trust and reputation of investment advisors
B. Helps build long-term relationships with clients
C. Promotes integrity in the industry

Overall, ethical dilemmas are an inevitable part of any profession, particularly investment advising. However, careful consideration of the options available and application of ethical principles can help resolve these dilemmas while maintaining a high standard of integrity in the industry.

Understanding the Fiduciary Responsibility of Investment Advisers

What is a Fiduciary Responsibility?

  • Investment advisers are fiduciaries, meaning they have a legal obligation to act in the best interest of their clients.
  • This requires rising above any conflicts of interest and ensuring that the client’s interests are always prioritized.

Principles of Utmost Good Faith and Trust

  • Investment advisers act on behalf of clients to manage their financial assets.
  • They must follow the principle of utmost good faith and trust, meaning they cannot make a profit at the cost of the client.
  • They must not take unfair advantage of the client’s trust and must prioritize the client’s interests at all times.

Obligations of Investment Advisers

  • Full disclosure of all facts is necessary, including disclosure of any conflicts of interest or potential conflicts of interest.
  • Suitable advice must be given to each individual client, based on their specific situation and requirements.
  • The advice must be formed on a reasonable or objective basis, without any bias towards the adviser’s interests.
  • Proper execution of the work assigned to the adviser must take place without any conflicts of interest.

Importance of Fiduciary Responsibility

  • The fiduciary responsibility of investment advisers is essential to protect clients and ensure that they receive suitable advice for meeting their financial goals.
  • It builds trust and confidence between the client and the adviser.
  • Failure to fulfill this responsibility can lead to legal and ethical consequences for the adviser.

Do’s and Don’ts for Investors issued by SEBI

Do’s for Investors

  1. Deal only with SEBI registered Investment Advisers.
  2. Check for SEBI registration number and ensure validity.
  3. Pay advisory fees through banking channels and maintain receipts.
  4. Ask for risk profiling and insist on advisory based on it.
  5. Clear doubts and ask relevant questions before acting on advice.
  6. Assess risk-return profile, liquidity, and safety before making investments.
  7. Insist on getting terms and conditions in writing and read them carefully.
  8. Be vigilant in transactions.
  9. Approach appropriate authorities for redressal of doubts/grievances.
  10. Inform SEBI about Investment Advisers offering assured/guaranteed returns.

Don’ts for Investors

  1. Do not deal with unregistered entities.
  2. Do not fall for stock tips offered as investment advice.
  3. Do not give your money for investment to the Investment Adviser.
  4. Do not fall for promises of exorbitant/assured returns. Do not let greed affect decisions.
  5. Do not get carried away by luring advertisements or market rumours.
  6. Avoid transactions only based on phone calls/messages from Investment Advisers.
  7. Do not take decisions just because of repeated messages/calls by Investment Advisers.
  8. Do not fall prey to limited period discounts/incentives/gifts offered by Investment Advisers.
  9. Do not rush into investments that do not match risk taking appetite and investment goals.

Note: SEBI (Securities and Exchange Board of India) is a regulatory body that oversees the securities market in India.

Addressing Annual Audit Observations as an Investment Adviser

1: Conducting Compliance Audit

  • Investment advisers are required to conduct a compliance audit on a yearly basis.
  • The audit is to be conducted by a Practising Chartered Accountant.

2: Disclosing Material Audit Observations

  • Investment advisers must disclose any material audit observations to their clients.
  • Material audit observations are those that are significant enough to potentially impact a client’s decision to work with the adviser or affect their investment decisions.

3: Addressing Audit Observations

  • Investment advisers should take necessary steps to address any audit observations raised by the auditor.
  • This includes developing an action plan to rectify any compliance issues or weaknesses identified during the audit.
  • Advisers should ensure that they have proper processes and controls in place to prevent recurrence of the identified issues in the future.

4: Timely Action

  • Investment advisers should take timely action to address any audit observations and communicate the same to their clients.
  • It is advisable to proactively update clients on the status of the action plan and any progress made towards addressing the audit observations.

5: Importance of Addressing Audit Observations

  • Addressing audit observations is important for investment advisers to maintain their credibility and reputation with clients.
  • It helps ensure that advisers are complying with all regulatory requirements and providing high-quality services to clients.
  • Failure to address audit observations can lead to regulatory penalties or legal liabilities, and can negatively impact an adviser’s business.

Securities and Exchange Commission (SEC) in the US

Disclosure Requirements:

  • SEC requires registered advisers to disclose any financial condition that would impair the ability to meet contractual commitments to clients.
  • Advisers must disclose certain disciplinary events within the past 10 years that are materially important.
  • Advisers must adopt and implement written policies to identify and address conflicts and compliance risks.

Code of Ethics:

  • Advisers registered with the SEC must adopt and enforce a written code of ethics.
  • The code of ethics must set minimum standards of conduct for all supervised persons.
  • Supervised persons must comply with federal securities laws.
  • Access persons must report securities holdings and personal securities transactions to the Chief Compliance Officer (CCO) or other designated person.
  • Pre-approval is required for investments in IPOs or limited offerings.
  • Supervised persons must report violations of the code to the CCO or other designated person.
  • Each supervised person must receive a copy of the code and provide a written acknowledgment of receipt.
  • The adviser must keep copies of the code, records of violations and actions taken against violators, and copies of each supervised person’s acknowledgment.

Australian Guidelines for Financial Advisers

Best Interest Standard

In Australia, financial advisers are required to act with competence, honesty, integrity, and fairness. The best interest standard must be met to ensure clients are receiving advice that is in their best interest. The following steps must be taken to satisfy the best interest standard:

  1. Identify the client’s financial situation, objectives, and needs.
  2. Identify the subject matter of the advice sought by the client.
  3. Identify the client’s relevant circumstances – the objectives, financial situation, and needs that would be considered relevant to advice sought on that subject matter.
  4. Ensure the information is complete and correct; make inquiries if gaps or inconsistencies are apparent.
  5. Consider whether it is reasonable to recommend a financial product when advising the client; only recommend products after thoroughly investigating the most appropriate products relevant to the client’s circumstances.
  6. Base all judgments on the client’s relevant circumstances when advising them.
  7. Take any other step that would reasonably be regarded as being in the best interests of the client, given the client’s relevant circumstances.

Financial advisers who violate these conditions may face strict penalties, including bans and disqualification from acting as an adviser.

Mock Test:-

0 votes, 0 avg

Investment Advisor Level 1


1 / 73

1. Which role does a financial intermediary play in the Indian financial market?

2 / 73

2. What is the role of an Insurance Ombudsman?

3 / 73

3. What should be the basis for providing advice as an investment adviser?

4 / 73

4. Which types of complaints are not addressed in SCORES?

5 / 73

5. What is the impact of ethical behavior on an investment adviser's reputation?

6 / 73

6. When should an insurance company resolve a grievance?

7 / 73

7. What should advisers do regarding conflicts and compliance factors, according to the SEC?

8 / 73

8. What is one of the main problems in the advisory business highlighted in the passage?

9 / 73

9. What happens if a listed company does not redress a complaint within 30 days?

10 / 73

10. What should investors avoid in their transactions?

11 / 73

11. What is one of the requirements for advisers registered with the SEC regarding their code of ethics?

12 / 73

12. Why is ethical conduct important in business?

13 / 73

13. What is the key aspect to consider before making investments?

14 / 73

14. What is one of the wrong practices mentioned in the passage?

15 / 73

15. What is one of the requirements for investment advisers registered with the SEC regarding their advisory fees?

16 / 73

16. What should be the focus of a financial intermediary for successful achievement of financial goals?

17 / 73

17. Where can a client lodge their grievances if they are not satisfied with the response of the intermediary?

18 / 73

18. What is the maximum time limit for the resolution of a grievance as per the guidelines/instructions?

19 / 73

19. What is the purpose of the grievance redressal system in banking?

20 / 73

20. Why is it important for investment advisers to be ethical role models?

21 / 73

21. Which online mechanism set up by SEBI deals with complaints related to all products and entities regulated by it?

22 / 73

22. What principles guide the Securities Appellate Tribunal (SAT) in its procedures?

23 / 73

23. What is the role of a financial intermediary?

24 / 73

24. What is churning in the advisory business?

25 / 73

25. Which entity provides an opportunity for both parties to present their case and tries to broker a settlement?

26 / 73

26. What is the time limit for filing an appeal with the SAT?

27 / 73

27. What is the role of a Practising Chartered Accountant in conducting the compliance audit?

28 / 73

28. How can ethical dilemmas be resolved?

29 / 73

29. What type of grievances can be addressed through the Investor Services Centre (IS of the stock exchange?

30 / 73

30. How do ethical principles differ from legal behavior?

31 / 73

31. What powers does the SAT have for discharging its functions under the SEBI Act?

32 / 73

32. Which entity is responsible for handling grievances related to the National Pension System (NPS)?

33 / 73

33. How can misrepresentation of product risks be addressed?

34 / 73

34. What is an ethical dilemma?

35 / 73

35. What is the purpose of the 'best interest standard' in Australia?

36 / 73

36. If a policyholder is not satisfied with the resolution provided by the insurer, what is the next course of action?

37 / 73

37. What should be the guiding principle in resolving ethical dilemmas?

38 / 73

38. What can happen if ethical principles are not followed in business?

39 / 73

39. Why is it important to educate investors about risks?

40 / 73

40. According to the Australian Guidelines, what steps should an adviser take to satisfy the 'best interests' standard?

41 / 73

41. What is the purpose of the grievance redressal system for investment advisers mandated by SEBI?

42 / 73

42. Which of the following is NOT a fundamental ethical principle?

43 / 73

43. What is the maximum time allowed for resolving a complaint as per IRDAI's regulations?

44 / 73

44. If the complainant accepts the Ombudsman's recommendation, what should they do next?

45 / 73

45. Which complaints fall under the purview of other regulatory bodies and are not dealt with by SEBI?

46 / 73

46. What should an investment adviser prioritize over personal earnings?

47 / 73

47. What is the definition of ethics?

48 / 73

48. What obligation does an investment adviser have in terms of disclosure?

49 / 73

49. What is the first recourse for certain categories of complaints against listed companies?

50 / 73

50. What is an alternative dispute redressal mechanism available to investors apart from approaching the court?

51 / 73

51. How can policyholders register complaints with IRDAI?

52 / 73

52. What is the role of SEBI in the grievance redressal process?

53 / 73

53. What types of complaints can be referred to the Banking Ombudsman?

54 / 73

54. What is the role of investment advisers in ensuring ethical conduct?

55 / 73

55. What are some common problems in the advisory business?

56 / 73

56. Where should a complaint be filed if it relates to non-repayment of deposits by companies or bonds and debentures issued by unlisted companies?

57 / 73

57. What is a key requirement of an adviser's code of ethics, according to the SEC?

58 / 73

58. Which principle forms the foundation of fiduciary responsibility for investment advisers?

59 / 73

59. Why is trust important in the relationship between an investment adviser and a client?

60 / 73

60. Who is responsible for conducting the compliance audit for investment advisers on a yearly basis?

61 / 73

61. What information does the Securities and Exchange Commission (SE require registered advisers to disclose to clients?

62 / 73

62. Which authority can be approached for complaints related to the non-repayment of deposits by an NBFC?

63 / 73

63. According to the Australian Guidelines, what should advisers consider when recommending a financial product to clients?

64 / 73

64. What is the "Client First" principle in ethical conduct for investment advisers?

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65. What should investors insist on before accepting investment advice?

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66. What is the role of the Banking Codes and Standards Board of India (BCSBI)?

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67. Which entity is appointed by the RBI to address complaints related to banking services?

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68. What penalties can be imposed in Australia for violating the conditions of competence, honesty, integrity, and fairness?

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69. Which disputes can be brought to an Insurance Ombudsman?

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70. How long does an Insurance Ombudsman have to make a recommendation after receiving a complaint?

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71. Who can a complainant approach if the insurance company fails to resolve a grievance within 2 weeks?

72 / 73

72. What should be the primary focus of a financial intermediary?

73 / 73

73. What needs to be considered when initiating the judicial process for grievance resolution?

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