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Helping Clients Make Good Choices

The recent release of the Department of Labor (DOL) conflict of interest rule reinforces the importance of client education.


Client education is crucially important because financial professionals’ legal and moral obligations center on the belief that clients have the right to determine which course of action is in their best interest. When individuals are empowered to make these decisions, we refer to them as autonomous decision-makers. One goal of financial advisors should be to increase their clients’ autonomy, which advisors can do by providing clients with the best information in a manner that is designed to help clients correctly incorporate it into their decision-making process.


However, this is not an easy task. A recent study conducted by the Cary M. Maguire Center for Ethics in Financial Services and the New York Life Center for Retirement Income was published in the Summer 2016 issue of The Journal of Retirement. The study examined the top ethical concerns of financial advisors working in the field of retirement income planning. Respondents indicated, in order of priority, they were concerned about:


[1] Protecting clients from elder financial abuse.


[2] Clients’ understanding of the complexities of their retirement income plans.


[3] Clients’ ability to understand the financial products and services offered to them.


[4] Sales representatives or other agents misrepresenting financial retirement income products to clients.


[5] Retirement income professionals lacking proper knowledge about Social Security claiming strategies to best serve their clients.


The qualitative aspect of the study was a series of interviews with financial advisors. The results indicated that advisors believed the majority of any misrepresentation that occurred was the result of advisors’ lack of knowledge rather than any sort of intent to harm the client or intent to benefit at the client’s expense.


All of these concerns get to the heart of the matter: a professional obligation to promote clients’ autonomy. We often think that promoting autonomy is simply a matter of transmitting relevant information to the client. However, this is not enough. If our goal is to create autonomous clients, we need to think in a more holistic fashion. Specifically, autonomous decisions have the following characteristics:


» Not overwhelmed by emotion.

It is perfectly acceptable to appeal to emotions in persuading people to purchase a suitable product or service. It is ethically unacceptable, however, to attempt to overwhelm a client’s rational capacities through emotional manipulation. Just as people can be blinded by passion, they also can be blinded by emotion.


» Free from unwanted interference: Clients should determine from whom they receive advice and counsel. This freedom from unwanted interference also should apply to family members and other interested parties. The implication is that advisors must be acutely aware of the possibility that their elderly clients may be the victims of elder abuse or exploitation as a result of interference by those trying to take advantage of them.


» Relevant facts placed in the appropriate context.

As we know, facts take on different importance when placed in a particular context. For example, consider the true statement that the United States Treasury does not have sufficient cash on hand to make good its pledge to guarantee money deposited in Federal Deposit Insurance Corp.-backed savings accounts. Unscrupulous advisors could present these facts in a way that could lead unsuspecting investors to believe that their money is not safe and secure in an FDIC-insured savings account. In this case, facts are used to persuade people of the truth of a highly debatable conclusion. The lesson is that it is not sufficient to present the facts to clients, but it is necessary to present the facts in the appropriate context that allows people to reach an accurate and reasonable interpretation easily.


» Providing sufficient time to reflect upon alternatives.

Ethics demands that we do not create a false sense of urgency and that we encourage people to take the time that they need in order to make a good decision. There are certainly reasons for an advisor to encourage a client to act now; some of these reasons are altruistic (i.e., advisors are well-aware that clients may put off important decisions about financial matters due to fear or discomfort), but some of these reasons are selfish (i.e., the advisor’s dominant interest is in closing the sale). Part of what it means to promote autonomy is to allow clients to determine the pace of the decision-making process.


One of the heartening findings of the study was that most respondents were convinced that the vast majority of advisors (and their organizations) were interested in and committed to doing business in accordance with ethical principles. The danger, according to the respondents, was that a lack of advisor and client education can prevent advisors from making good recommendations, which results in limiting clients’ capacity for autonomy.


The positive conclusion is that a lack of education is a clear problem that has a clear solution. Advisors and their clients simply need to work together to achieve it.


Julie A. Ragatz is director of the Cary M. Maguire Center for Ethics in Financial Services and assistant professor of ethics at The American College. She may be contacted at [email protected]

Julie Anne Ragatz is director of the Cary M. Maguire Center for Ethics in Financial Services and assistant professor of ethics at The American College. [email protected].

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