Views on improving the integrity of global capital markets
06 September 2018

Ethics in Practice: Client Promotion of Services. Case and Analysis–Week of 3 September

CFA Institute Ethical Decision-Making Framework

Check out the analysis for this week’s case (3 September) to see how you did in practicing your ethical decision-making skills.

Case

King is a successful investment adviser with a number of high-net-worth clients who are very happy with him as their adviser. Many of King’s clients recommend his advisory services so that their friends and family can achieve the same positive results. King encourages these recommendations as a way to build his business. Each year, King holds an elaborate party for those clients who have referred new clients to his advisory firm to thank them for these referrals. At the party, King distributes nominal gift cards to attendees. In some instances, King offers discounts on advisory fees to clients who have provided him with referrals that prove to be particularly lucrative. Many of the clients attending these celebrations have been referred to King by other clients and they have, in turn, continued the cycle of recommending King to a wider circle of friends and family.

King’s actions are

  1. acceptable as a proper method for client development.
  2. acceptable as a reward for client loyalty.
  3. acceptable as long as he treats all clients fairly.
  4. unacceptable.

Analysis

This case relates to CFA Institute Standard VI(C): Referral Fees, which states that CFA Institute members must disclose any compensation, consideration, or benefit paid to others for the recommendation of services. In this case, King provides an elaborate party; distributes gift cards; and, in some cases, offers discounted advisory fees to only those clients who refer potential clients to him. These benefits must be disclosed. The facts of the case do not state whether King discloses the benefits that he gives for referrals to the potential incoming clients. The fact that some of the clients later become aware that he pays for referrals when they themselves are paid such fees is insufficient disclosure. If King wanted to hold a party or give gift cards to all his clients to reward their loyalty, whether or not they provided referrals, that would be acceptable. Arguably, King treats his clients fairly because he is offering the opportunity to receive these benefits and fee discounts to all his clients, so long as they make referrals to his business. Whether the clients access these benefits by making referrals is up to them. But regardless of whether King is treating all clients fairly, by not disclosing the benefits and compensation he awards for referrals, he has violated Standard VI(C). Choice D is the best answer.

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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