Advisers should use ethics to 'hedge risk and make money'

Financial advisers need to craft and embrace a set of ethical standards for their firms as a way to build a franchise and reduce risk, according to Laura Hartman, professor of business ethics in DePaul University's College of Commerce. Ms. Hartman offered her take on how financial advisers can use ethics to “hedge your risk and make money,” at the Investment Management Consultants Association in Chicago on Monday. “Your [professional] survival depends on your credibility,” she said. “Ethical standards should be thought of as a safeguard against challenges to your reputation.” However, she added, business ethics don't arrive naturally, which is why they need to be established and nurtured. “An ethical business environment is not something that happens by accident; you've got to pay attention to it,” she said. “Some people believe if they just hire well, they'll have a decent culture.” Ms. Hartman recommended creating a formal mission statement that includes specific guidelines and standards that are suited to an adviser's practice. “We're talking here about ethics with regard to the stakeholders' perspective, and that includes both employees and clients,” she said. “When drafting your mission statement, think of things in ethical terms, because that triggers thoughts.” Once a mission statement has been created, she advised ongoing and enhanced training to help instill a culture of thinking in ethical terms. “Don't just print, post and pray,” she said, citing examples of posting a list of rules on an office wall. “You need to be aware that if you only pay attention to the rules, you've only set a floor,” she added. Ms. Hartman suggested considering actions with regard to the “newspaper test.” “How would you feel if what you did was going to be on the front page of the newspaper?” she said. In establishing ethical guidelines, she explained that it is also important to think beyond established rules and laws. She cited an example from 1991 when she was conducting research on whether it was legal or ethical for an employer to screen employee e-mails. At that time, she found that “there were no laws pertaining to e-mail,” she said. The absence of established laws, she said, does not automatically condone actions as being ethical. The ongoing maintenance and development of an ethics statement are as important as the statement itself, she added. “If you don't measure, monitor and evaluate the performance of yourself and others, you won't uncover vulnerabilities, and you need to see where you are vulnerable and unprotected,” she said.