published Wednesday, March 20th, 2013

Personal Finance: Demand your rights as an investor

Chris Hopkins

Investors may suspect with some justification that they have not always been treated fairly by providers of financial services.

In an increasingly complex world, investment options promoted by the industry have become more opaque, making it tougher for investors to properly evaluate risks and costs. Meanwhile, the financial crisis demonstrated once again that some institutions place their own interests ahead of their customers, clients and in some cases the taxpayers called upon to rescue them.

Ex-post regulatory efforts such as Dodd-Frank are usually well-intentioned but rarely successful. Crooks will be crooks, and no amount of additional paperwork will erase that fundamental identity. The Madoffs of the world will always be with us. But to address the broader issues of transparency and simplicity within the investment industry, and to empower investors to demand fair dealing, a new ethical paradigm is needed.

This month, the CFA Institute rolled out a powerful tool in the battle to shift that paradigm. The Statement of Investor Rights is a concise, 10-point enunciation of the fundamental principles by which investors should demand to be treated. Securing a commitment to fulfill these basic expectations should be a precondition to entering into any relationship with an advisor.

Honesty, objectivity and confidentiality must be a fundamental prerequisite in any financial transaction. But restoring trust in the financial services industry requires a deeper commitment to upholding basic ethical principles that place the interest of the client ahead of the interest of the financial professional.

Central to repairing that trust is the disclosure of existing or potential conflicts of interest. Within some financial services firms, the structure of compensation can sometimes incent representatives to favor one product over another. Understanding this potential conflict allows the buyer to make a better informed decision. Full disclosure demonstrating that fees and expenses are reasonable is always appropriate and conducive to a mutually beneficial relationship.

Clients are also entitled to a commitment that their financial representative has taken the time to understand their particular situation and is recommending solutions and products that are appropriate to the goals, objectives and risk tolerance of that specific client.

Fair treatment relative to other clients is another inherent right, along with sufficiently detailed communications in plain language and appropriate records to support the investment recommendations or advice offered. Taken together, these minimum standards of conduct can serve to reinforce the restoration of trust between customers and financial service providers.

While many organizations have promoted investor rights, the CFA Institute occupies a uniquely credible position as an advocate for ethical treatment of investment clients. Since 1947, CFA charterholders in 130 countries have pledged to abide by the CFA Code of Ethics and Standards and Professional Conduct, pledging to place the interests of their clients ahead of their own or that of their firms.

It is time to rebuild trust between investors and the financial services industry. The CFA Institute Statement of Investor Rights is a great place to begin. Download a copy at CFAInstitute.org/FutureFinance and demand your rights.

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