Module 4 – Clients and Ethics

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 Module 4 – Clients and Ethics
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INTRODUCTION

Many professionals enter into the field of wealth management to help others grow and improve their
life circumstances. Yet, when working with clients, wealth managers must maintain clear boundaries to
assure professional integrity and responsibility.

This module is comprised of one lesson with the following main topics:
• Expectation of clients
• Challenges to wealth management
• Code of ethics for wealth managers

MODULE LEARNING OUTCOME

In this module, you should be able to:

1. discuss the clients goals and constraints;
2. explain the challenges of wealth managers; and
3. explain the importance of ethics in wealth management.

Lesson 1:
CLIENTS AND ETHICS

SPECIFIC LEARNING OUTCOMES

In this lesson, you are expected to:

1. differentiate relationship, fear-based, curious, and greedy clients;
2. discuss the association of international wealth manager code of ethics; and
3. discuss financial planning standards board code of ethics.

PRE-ASSESSMENT

Instruction: Read each item carefully. Identify whether the item is true or false.
1. In the initial meeting with the client, the wealth manager should try to understand the clients' needs,
expectations, constraints and fears. TRUE

2. Fear-based clients tend to be easy to talk to at the initial meeting. FALSE

3. Relationship clients often need educating, although they may seemingly not want it. FALSE

4. Curious clients take a great interest in what a financial advisor does. TRUE

5. Greedy clients may appear to be charming initially because they are often marked by high energy and
a quick mind. TRUE

6. The status quo in the private banking and wealth management industry is changing as the focus shifts
to client service and value delivery. TRUE
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7. Risk management systems and processes are being upgraded to provide integrated approaches to
better align risk and value. TRUE

8. Members shall exercise their profession in a dependent, diligent and professional as well as ethical
manner. FALSE

9. Members shall know and comply with the provisions of the laws, regulations and self-regulatory rules
as well as all internal rules of their employer. TRUE

10. Members shall inform their employer that they have to comply with these Rules of Conduct and
Fundamental Principles of Professional Ethics. TRUE

LESSON MAP

CLIENTS AND
ETHICS

Client Goals and Ethics for Wealth

Constraints Managers

Association of
Relationship Clients International Wealth
Manager Code of Ethics

Financial Planning
Fear-based Clients Standards Board Code of
Ethics

Curious Clients

Greedy Clients

The map above shows the various factors to be considered in client’s expectation
and wealth manager’s code of ethics.
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CORE CONTENTS

ENGAGE: PICTURE ANALYSIS

Activity 1.
Instruction: Observe the picture below and answer the question that follows.

1. What is being implied in the picture?

___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________

EXPLORE: READING CONCEPTS

Activity 2
INSTRUCTIONS: Read the concepts discussed below.

EXPECTATION OF CLIENTS

CLIENT GOALS AND CONSTRAINTS

Client Profiling
How do the managers find out what is most important to their clients? The best way to do that is to
begin by listening without asking. The wealth manager should try to go beyond what the client specifically
tells to develop an even deeper level of understanding.

In the initial meeting with the client, the wealth manager should try to understand the clients' needs,
expectations, constraints and fears.

Client profiling is a useful concept that helps in establishing a relationship with the client. It helps in
figuring out the financial personality of the client. While clients within each profile may be dissimilar, they can
be broadly identified as following types:

Relationship clients
These people want to form a bond with someone whom they trust. They tend to be easy to talk to at
the initial meeting. Much of the interaction is informal and conversational. Getting to know these clients as
individuals is of utmost importance. They want to feel comfortable. They tend to be very good, long-term
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clients and very nice to work with. While they may defer to the recommendations of financial advisor, it is the
responsibility of financial advisor to keep them involved in the process.

Fear-based clients
These people tend to have very little financial experience or have had bad financial experiences.
These clients are also reliant upon financial advisors. They often need educating, although they may
seemingly not want it. The job of the financial advisor is not to take care of them but rather to work with them.
They have to be helped in gaining confidence in the money arena.

Curious clients
They are knowledgeable clients. They are working with financial advisors because of time constraints.
They take a great interest in what a financial advisor does. These clients would have formed their opinions
through what they have read or heard. They often will continue to focus on items that validate their thinking.

Greedy clients
These are often the clients who are only interested in some in-articulated and ever-changing
objectives, usually measured by short-term results. They may appear to be charming initially because they
are often marked by high energy and a quick mind.

After getting to know clients and developing an understanding of their predilections, the next step is to
delve into the facts of their individual situations. This is typically done through a fact-finding form and copies
of all their financial statements. As the financial advisor goes through the assembled data and continues to
ask clients why they own this or that, he should be very careful not to criticize or attack past financial
decisions of the client.

CHALLENGES TO WEALTH MANAGEMENT IN INDIA

REGULATIONS AND CLIENT EXPECTATIONS CHANGE STATUS QUO IN WEALTH MANAGEMENT

INDUSTRY, FINDS PWC RESEARCH
The status quo in the private banking and wealth management industry is changing as the focus shifts
to client service and value delivery, according to our 2011 Global Private Banking and Wealth Management
survey -Anticipating a New Age in Wealth Management. New competitors are challenging the dominance of
established firms, and the impact of new regulations and more demanding client expectations are forcing
private banks and wealth managers to change their client service infrastructures and the way they operate.
Those who can master change will be in a position to lead the industry and we believe that clear industry
leaders and losers will emerge by the middle of this decade. Some highlights:
• Today’s client is cautious, smart, less loyal, and expects excellent service and clear value.
• Regulation has become the not-so-invisible hand, increasing the cost of operations.
• Greater operational efficiency and effectiveness are required, not just to compete but to survive.
• Standing still is no longer an option and institutions must now quickly adapt or face being left behind.
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In PwC's 2011 biennial report, which surveyed a record 275 institutions from 67 countries, we found
that wealth management continues to be a lucrative business with untapped potential for significant growth if
institutions can be agile in adapting to meet changing demands. Our 2011 survey found that the industry
faces multiple pressures in five key areas, as follows:

Performance and change

The DNA of the wealthy investor has been transformed as a result of the global financial crisis and
recent scandals. The result is higher expectations of service and value. Clients are more active in managing
their own financial affairs and they are paying increased attention to reputation, regulatory compliance and
risk management.

Markets and clients

Shifting patterns of world wealth between emerging and established markets and tougher regulatory
oversight present challenges for some wealth managers and creates new opportunities for others. Wealth
managers must adapt their networks and businesses.

Client relationship managers and human capital

The shortage of talent is one of the biggest barriers to future growth. Top quality people are becoming
more valuable, more difficult to source, and more expensive to train. The industry is getting better at
institutionalizing client relationships. Links between performance and pay are becoming critical. New
strategies, incentives, and support are needed to attract and retain qualified professionals.

Operations and technology

The industry remains historically under-invested and respondents are at different stages of their
operational evolution. Many continue to run legacy systems and manual processes. Technology budgets are
being directed to better support client relationship managers and the front-end client experience.

Risk management and regulation

Risk management systems and processes are being upgraded to provide integrated approaches to
better align risk and value. The global wealth management industry is now at the forefront of regulatory
change. Cross-border standards, customer protection and transparency are anticipated to impact the front-
end client experience and increase costs.

WEALTH MANAGEMENT MARKET IN INDIA

Demographics
• Sustained GDP growth has created wealth in many sectors, like gems and jewellery, I.T, Pharma, E-
retailing, financial services, and BPO.
• GDP growth is concentrated in Urban Centres.
• Mumbai alone accounts for 50% of the deposits held by foreign banks.
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• High net worth individuals (HNWI) are defined as those with financial assets of at least $1 million
excluding residential property.
• Estimated 70,000 HNWI are there in India (compared to 8.3 million worldwide).
• Number of HNWI in India has increased by 14.6% in 2004-05.

There is no precise definition of how much net worth entitles an asset-holder to be called HNWI.
Generally, however, if a person has liquid financial assets over 1 million dollars, the person is considered an
HNWI. A person having less than 1 million but more than 1,000,000 dollars is called affluent. On the other
hand, an individual with more than 5 million dollars is liquid financial assets may be considered ultra HNWI.

Major Product Offerings

• Portfolio management services (PMS)
• Mutual funds
Select Players

• Insurance products
• Equity
• Fixed income instruments
• Mortgage lending
• Real estate
• Art funds
• Derivatives and structured products
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KEY TRENDS
• Rapidly growing market
• Clients becoming increasingly sophisticated
• Open product architecture approach adopted by wealth manages
• Wealth managers are being looked upon as “trusted advisors” rather than “money managers” for their
clients.

KEY LIMITATIONS
• Market is in its nascent stage.
• There is lack of required Trust. Financial Scams & Malpractices when it happens reduces trust
further.
• In India 85% of the financial assets are still in the form of bank deposits
• Low usage of technology tools by wealth managers.
• Shortage of skilled and experienced wealth managers.
• Many clients feel fees charged by wealth manager are exorbitant

CODE OF ETHICS FOR WEALTH MANAGERS

A code of ethics issued by a business is a particular kind of policy statement. A properly framed code
is, in effect, a form of legislation within the company binding on its employees, with specific sanctions for
valuation of the code. It may be a document which may outline the mission and values of the business or
organization, how professionals are supposed to approach problems, the ethical principles based on the
organization’s core values and the standards to which the professional will be held.

(I) ASSOCIATION OF INTERNATIONAL WEALTH MANAGER (AIWM) CODE OF ETHICS

The Association of International Wealth Management AIWM is a non-profit association established to
encourage, promote and strengthen global education in the private banking industry and to set a globally
recognized standard for the qualification of private banking professionals. The AIWM objectives seek to
ensure the highest ethical conduct of its members and thus contribute to the integrity of global capital
markets.

Rule 1: Principle of Professional Ethics

Members shall exercise their profession in an independent, diligent and professional as well as
ethical manner. They undertake in all cases to give priority to the interests of the clients and commit to treat
them fairly. The principles of professional ethics can be divided into four fundamental principles:

• Independence: Members must exercise independent and objective judgment in their professional
activities.
• Integrity: Members must preserve their professional and personal integrity.
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• Professionalism and diligence: Members must always act as qualified professionals and perform
their activities with the diligence required from qualified professionals.
• Loyalty and priority of the clients’ interests: Members owe a duty of loyalty to the clients. They
must under all circumstances give priority to the clients’ interests and ensure that they are treated
fairly and equitably.

Rule 2: Compliance with Applicable Rules

Members shall know and comply with the provisions of the laws, regulations and self-regulatory rules
as well as all internal rules of their employer that are applicable to their activities. Members must comply with
the provisions of laws, regulations and rules enacted by self-regulatory bodies. They must also abide with the
internal guidelines issued by their employer.

Role 3: Duty of Information

Members must ensure that the information they provide to clients and investors is clear, timely and
accurate. They are prohibited from promising a given return.

Rule 4: Conflicts of Interests

Members shall avoid any situation of conflict with interests of clients. If a conflict cannot be avoided,
priority has to be given to the interests of the clients. Members treat the interests of clients and investors in
accordance with the principle of equal treatment. Members have to disclose any fact affecting their objectivity
and their independence.

Rule 5: Duty to Inform the Employer

Members shall inform their employer that they have to comply with these Rules of Conduct and
Fundamental Principles of Professional Ethics. As a general rule, members should inform their employer that
they are a member of the Association of International Wealth Management and are therefore bound by these
Rules of Conduct and Fundamental Principles of Professional Ethics.

Rule 6 Sanctions
The effectiveness of regulating professional conduct by professional standards arises from the
existence of efficient penalties, recognized as such by and in the profession.

(II) FPSB CODE OF ETHICS

Financial Planning Standards Board India is a Public - Private Enterprises and a Professional
Standards Setting body that proactively guides the professionals to benefit and protect the public in the
country. FPSB India closely works with all the stakeholders' viz. the Government, the Regulators, the
Industries/Associations, the Corporate, the Media and the General objectives.

Code of Ethic 1 - Client First

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Place the client’s interests first. Placing the client's interests first is a hallmark of professionalism,
requiring the Financial Planning professional to act honestly and not place personal gain or advantage before
the client’s interest.

Code of Ethic 2- Integrity

Provide professional services with integrity. Integrity requires honesty and condor in all professional
matters. Financial Planning professionals are placed in positions of trust by clients, and the ultimate source
of that trust is the Financial Planning professional's personal integrity.

Code of Ethic 3 - Objectivity

Provide professional services objectively. Objectivity requires intellectual honesty and impartiality.
Regardless of the services delivered or the capacity in which a financial planning Professional functions,
objectivity requires Financial Planning professionals to ensure the integrity of their work, manage conflicts
and exercise sound professional judgment.

Code of Ethic 4 - Fairness

Be fair and reasonable in all professional relationships. Disclose and manage conflicts of interest.
Fairness requires providing clients what they are due, owed or should expect from a professional
relationship, and includes honesty and disclosure of material conflicts of interest.

Code of Ethic 5 - Professionalism

Act in a manner that demonstrates exemplary professional conduct. Professionalism requires
behaving with dignity and showing respect and courtesy to clients, fellow professionals, and others in
business-related activities, and complying with appropriate rules, regulations and professional requirements.

Code of Ethic 6 - Competence

Maintain the abilities, skills and knowledge necessary to provide professional services competently.
Competence requires attaining and maintaining an adequate level of abilities, skills and knowledge in the
provision of professional services. Competence also includes the wisdom to recognize one’s own limitations
and when consultation with other professionals is appropriate.

Code of Ethic 7 - Confidentiality

Protect the confidentiality of all client information. Confidentiality requires client information to be
protected and maintained in such a manner that allows access only to those who are authorized.

Code of Ethic 8 – Diligence

Provide professional services diligently. Diligence requires fulfilling professional commitments in a
timely and through manner, and taking due care in planning, supervising and delivering professional
services.
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EXPLAIN: GOING DEEPER

Activity 3:
INSTRUCTION. Read the questions below and answer them briefly.
1. What is client profiling?
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

2. Is ethics important in wealth management? Why or why not?

______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

3. How important it is to establish good relationship with clients? Explain your reasoning.
______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

4. What are the challenges of wealth managers?

______________________________________________________________________________________
______________________________________________________________________________________
______________________________________________________________________________________

TOPIC SUMMARY
In this lesson, you have learned that …
• Client profiling is a useful concept that helps in establishing a relationship with the client.
• Fear-based clients tend to have very little financial experience or have had bad financial experiences.
• Curious clients would have formed their opinions through what they have read or heard.
• Greedy clients are only interested in some in-articulated and ever-changing objectives, usually
measured by short-term results.
• Today’s client is cautious, smart, less loyal, and expects excellent service and clear value.
• Shifting patterns of world wealth between emerging and established markets and tougher regulatory
oversight present challenges for some wealth managers and creates new opportunities for others.
• A code of ethics issued by a business is a particular kind of policy statement.
• A properly framed code is, in effect, a form of legislation within the company binding on its
employees, with specific sanctions for valuation of the code.
• The Association of International Wealth Management AIWM is a non-profit association established to
encourage, promote and strengthen global education in the private banking industry and to set a
globally recognized standard for the qualification of private banking professionals.
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• Financial Planning Standards Board India is a Public Private Enterprises and a Professional
Standards Setting body that proactively guides the professionals to benefit and protect the public in
the country.

REFERENCES

• Jhabak, Pawan. Wealth Management. Himalaya Publishing House 2008.

• Ganti, Akhilesh. Investopedia. Retrieved from: https://www.investopedia.com/terms/
w/wealthmanagement.asp. Retrieved on: June 22, 2021