Wednesday, June 1, 2011

Investment Ethics Matter: And Not Because It Accounts for 20% of the CFA Exam

As AIM program graduates, who are candidates for the CFA charter prepare for their exams on Saturday, it is worth noting that ethics constitutes a large portion of the exam material. For instance, up to 20% of the material tested on the Level I CFA exam (which focuses on the tools and concepts relating to investment valuation and portfolio management and introduces basic concepts regarding securities laws, regulations, and ethical and professional conduct) is related to investment ethics. This material is primarily based on the candidates' understanding of the CFA’s Standards of Professional Conduct.

From the CFA Institute’s 2010 Standard of Practices Handbook the following material was obtained. The adherence of investment professionals to ethical practices benefits all market participants and increases investor confidence in global financial markets. Clients are reassured that the investment professionals they hire operate with the clients’ best interests in mind, and investment professionals benefit from the more efficient and transparent operation of the market that integrity promotes. Ethical practices instill public trust in markets and support the development of markets. Sound ethics is fundamental to capital markets and the investment profession.

The first decade of the 21st century was riddled with ethical mishaps that helped lead to a crisis within the investment industry. This period, unfortunately, encompassed many instances of unethical behavior—by business executives and investment professionals. The newspapers and airwaves brimmed with a succession of accounting frauds and manipulations, Ponzi schemes, insider trading, and other misdeeds. Each case resulted in heavy financial losses and stained reputations - especially the Bernie Madoff scandal.

Equally important has been the terrible toll these actions have taken on investors’ trust. Trust is hard earned and easily lost; corporations and individuals can safeguard themselves by committing to the highest standards of ethics and professional conduct.

Ethics is not merely a virtue to be demonstrated by CFA Institute members and candidates. Ethics must permeate all levels of the finance profession. Serving the best interests of the investing clients and employers lies at the heart of what collectively must be done to ensure a sense of trust and integrity in the financial markets. Although the drive to achieve such a lofty collective objective is critically important, the drive must ultimately start in the workplace.

It is imperative that top management foster a strong culture of ethics not just among CFA charterholders and candidates but among all staff members who are involved directly or indirectly with client relations, the investment process, record keeping, and beyond. In such a culture, all participants can see clear evidence of how extremely important ethics is when woven into the fabric of an organization, or in other words, all participants in the process will know that ethics genuinely matters.

Dr. David Krause, AIM program director noted, "We are proud that each of our students in the program takes an investment ethics course their last semester. We want to graduate proficient and ethical financial professionals. I am proud how seriously our students address the material in the course and I believe they will be true to the Marquette mission. Good luck to everyone taking the exam on Saturday – and remember that ethics is not just a topic on the CFA exam!"


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