Views on improving the integrity of global capital markets
09 August 2018

Ethics in Practice: Right Reasons to Transfer Retirement Funds? Case and Analysis

CFA Institute Ethical Decision-Making Framework

Check out the analysis to see how you did in analyzing this week’s  case (6 August) and determining which CFA Institute Standard was involved.

Many people are scrambling to quickly build their retirement savings. This week’s case considers the actions of a financial adviser in evaluating whether clients should switch to a pension plan that allows alternative investments. After reading the case below, be sure to join the conversation to share what you think is the right choice and what CFA Institute Standard of Professional Conduct is involved.

Case

Reese works for Calloway Asset Management, an independent financial adviser. Calloway provides advice to its clients about whether they should switch their retirement savings from an occupational pension scheme (such as a defined pension plan) to a self-invested personal pension (SIPP), which allows investing in a wide variety of alternative investments. These investments offer the possibility for greater returns but are typically more high risk, illiquid, and esoteric, such as overseas property. Clients are directed to Reese and Calloway for advice on switching to a SIPP through an “Unregulated Introducer” who facilitates the sale of alternative investments to clients that decide to switch. The Unregulated Introducer, an affiliate of Calloway, actively promotes and introduces clients to the concept of investing in alternative investments and provides information on particular investment vehicles.

If Reese recommends a client switch to a SIPP, the client returns to the Unregulated Introducer to purchase the alternative investments to place in his or her SIPP. The majority of Calloway’s, and thus Reese’s, clients are referred by the Unregulated Introducer. When determining whether a client should switch to a SIPP, Reese reviews the client’s overall financial circumstances, assesses the client’s existing pension provision, and evaluates the client’s attitude toward risk. But the predominant factor in Reese’s evaluation is the customer’s desire to use pension funds to purchase alternative investments.

Therefore, for almost all of his clients, Reese recommends that they transfer their retirement savings to a SIPP. The Unregulated Introducer receives a commission fee from the alternative investment sponsors if clients purchase an alternative investment for their SIPP. Reese is a shareholder of the Unregulated Introducer and serves as a director on its board. He benefits financially from both the fees paid by clients for the advice from Calloway on whether to move to a SIPP and the commissions paid to the Unregulated Introducer for its role in the sale of the alternative investments. Reese

  1. acted properly when evaluating whether clients should switch their assets to a SIPP.
  2. may assume that his clients are aware of the affiliation between Calloway and the Unregulated Introducer.
  3. must disclose his role as a director and shareholder of the Unregulated Introducer to client’s seeking advice from Calloway.
  4. does not need to consider the suitability of particular alternative investments when recommending client’s switch their assets to a SIPP.

Analysis

This case involves CFA Institute Standard III(A): Loyalty, Prudence, and Care; Standard III(C): Suitability; and Standard VI(A): Disclosure of Conflicts. Under Standards III(A) and VI(A), CFA Institute members have a duty of loyalty to their clients, must act with reasonable care and exercise prudent judgment, must place their clients’ interests before their own, and must disclose any conflicts of interest. The suitability standard requires CFA Institute members to make a reasonable inquiry into a client’s investment experience, risk and return objectives, and financial restraints to determine whether an investment is suitable in the context of the client’s portfolio.

Although Reese did inquire about clients’ relevant financial circumstances and tolerance for risk when making a recommendation about switching their assets to a SIPP, the facts indicate that the predominant factor in the recommendation was the client’s preexisting desire to purchase alternative assets. Thus, Reese’s work was not undertaken with reasonable care and prudent judgment because his evaluations and recommendations were unduly swayed by the client’s wishes rather than the financial circumstances, which means choice A would not be correct. Furthermore, knowing that clients will need to sell current investments to invest in a particular alternative asset, such as overseas property, Reese must consider the suitability of that investment when advising clients about whether to move their assets to a SIPP, so choice D is also not correct.

It is clear that the Unregulated Introducer will only benefit financially if Reese recommends clients transfer their pension funds into a SIPP. Accordingly, Reese, by virtue of his relationship with the Unregulated Introducer, has a financial interest distinct from the client’s interest in the outcome of the advice he gives. Therefore, a conflict of interest exists between the interests of Reese in the outcome of the advice and the client’s interest in that outcome. Reese failed to ensure that his clients were informed of Reese’s and Calloway’s relationship with the Unregulated Introducer, and that they were informed of the financial benefit to Reese if the clients purchased alternative investments. This lack of disclosure prevented clients from being able to make a fully informed decision about whether to seek advice from Calloway about transferring their pension funds into a SIPP and to use their existing pension funds to purchase alternative investments. Choice C is the best answer.

This case is based on facts from a recent Decision Notice from the UK Financial Conduct Authority.

Have an idea for a case for us to feature? Send it to us at ethicscases@cfainstitute.org.


More About the Ethics in Practice Series

Just as you need to practice to become proficient at playing a musical instrument, public speaking, or playing a sport, practicing assessing and analyzing situations and making ethical decisions develops your ethical decision-making skills. The Ethics in Practice series gives you an opportunity to “exercise” your ethical decision-making skills. Each week, we post a short vignette, drawn from real-world circumstances, regulatory cases, and CFA Institute Professional Conduct investigations, along with possible responses/actions. We then encourage you to assess the case using the CFA Institute Ethical Decision-Making Framework and through the lens of the CFA Institute Code of Ethics and Standards of Professional Conduct. Then join the conversation and let us know which of the choices you believe is the right one and explain why. Later in the week, we will post an analysis of the case and you can see how your response compares.


Image Credit: ©CFA Institute

About the Author(s)
Jon Stokes

Jon Stokes is the Director of Ethics and Standards Education at CFA Institute. His responsibilities include design and creation of on-line ethics education, development and maintenance of the CFA Institute Code of Ethics and Standards of Professional Conduct, and the design and management of the CFA Institute Ethical Decision-Making and Giving Voice to Values education programs. Stokes holds a JD degree.

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