Importance of Ethical Behavior in the Investment Industry
Approving home loans to customers without a proper appraisal to meet loan targets ended up snowballing into a financial crisis in the USA in 2008. A lack of adherence to loan appraisal norms meant several customers who did not have money to fulfill the loan requirements were given them. Financial institutions outdid each other to dole out these loans and pretty soon there was a housing bubble waiting to burst. Each unchecked loan added to this bubble.
In this case as in others where ethical norms are not followed trust is broken forever and huge damage is inflicted on the economy, wherein even players who fulfilled norms and conducted business ethically suffer.
The financial markets are the linchpins of the economy. Investors are willing to put in funds, entrepreneurs are willing to start big projects and householders are willing to make purchases (homes, appliances) based on a well functioning financial ecosystem. The foundation of a well functioning financial market lies in trust. Investors trust finance professionals to make well-researched investment choices for them. They believe that the professionals will use their skills and knowledge to best service them. Financial organisations rely on their employees to be open and transparent with their clients and not promise them the moon. They expect employees will behave ethically and fairly at all times.
Unlike several other industries where there are tangible goods or a clear outcome, the investment business is an ongoing process. Furthermore investors have to take the investment professionals words at face value. It is difficult for them to crosscheck details. This is why a high standard of ethics defines the investment industry.
The expectation from a CFA professional are not technical skills alone, but the highest standards in professional conduct.
Ethical businesses also have lower costs, as they are transparent in their dealings and do not come under the scrutiny of governing bodies and therefore legal cases for violation of norms.
Let us take a look at what happens when firms indulge in unethical behavior. They erode the trust of investors. Even if they have been offering fantastic results, they can do so only in the short run. Investors become vary and stop putting in money. Projects that were relying on funding come to a grinding halt. The economy ends up shrinking, rather than expanding and thriving.
Professionals lose their jobs and reputation for unethical behavior. Governments are now very hard on economic offenders and several fund managers (for example, Bernie Madoff) found themselves doing jail time for misleading and swindling their clients.
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