Chapter 1

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" bgproperties="fixed" background="122285a1erlcgo.gif"> <div> <FONT SIZE="5" COLOR="#FFCC66" FACE="Arial" ><B>Agent Ethics</B></FONT><B>     |     </B><A HREF="index.htm" TARGET="_top" TITLE="Agent Ethics"><U><B>home</B></U></A><B>            </B><A HREF="id15.htm" TARGET="_top" TITLE="TABLE OF CONTENTS"><U>TABLE OF CONTENTS</U></A>   |   <A HREF="id54.htm" TARGET="_top" TITLE="GLOSSARY"><U>GLOSSARY</U></A>   |   <A HREF="id67.htm" TARGET="_top" TITLE="Print Version"><U>Print Version</U></A>   |   <A HREF="id56.htm" TARGET="_top" TITLE="Review Questions"><U>Review Questions</U></A>   |   <A HREF="id55.htm" TARGET="_top" TITLE="FINAL EXAMINATION"><U>FINAL EXAMINATION</U></A></div> <bR> <div> </div> </td> </tr><tr> <td valign="top" width=210 BGCOLOR="#FFCC66" TEXT="#080000" background="121d2c00dkelyh.gif"> <div> <A HREF="mailto:instructor@wallstreetinstructors.com" TARGET="_top" TITLE="mailto:instructor@wallstreetinstructors."><U><IMG SRC="12caf630.gif" border=0 width="175" height="99" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></U></A></div> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="83" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 16 ><NOBR><div> <A HREF="mailto:instructor@wallstreetinstructors.com" TARGET="_top" TITLE="mailto:instructor@wallstreetinstructors."><U>Instructor</U></A></div> </NOBR></tD> </tR> </TABLE></div> <bR> <div> Copyright ©2004 Wall Street Instructors, Inc. All rights reserved. No portion of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means electronic, mechanical, photocopying, recording or otherwise without prior written permission of Wall Street Instructors, Inc.</div> <bR> </td> <td valign="top" height=390 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <I>Chapter 1</I></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Chapter One:  </B><FONT SIZE="3" COLOR="#000000" FACE="Arial" ><B>Introduction to Ethics</B></FONT></div> <bR> <div>      </div> <div> <I><B>Important Lesson Points</B></I></div> <bR> <div> The important points addressed in this lesson are:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The Golden Rule is the foundation of ethics</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The fact of society-that we don't exist alone-makes an ethical system necessary</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Two methods exist to resolve disagreements between members of a society: force and reason</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The use of force destroys relationships and is, therefore, an inappropriate principle for conflict resolution in a society</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The Golden Rule is the most palatable principle on which to base a reasoned approach to conflict resolution for the greatest number of people</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Compliance and ethics are closely related concepts, but they are not identical</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Ethics applies to virtually every act of and tool used by the financial services practitioner</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Professions are characterized by specialized knowledge, a service-before-income outlook and an ethical code to which members are expected to adhere</div> <bR> <bR> <div> <I><B>Introduction</B></I></div> <bR> <div> It isn't often that we think about the idea of ethics except, perhaps, to decry the actions of someone who has acted unethically and been exposed in the media.  We are usually too busy pursuing our livelihood or simply living our life to give it much thought.  Despite that, there is considerable benefit to the financial services practitioner in identifying and internalizing those ethical principles that should guide his or her actions.  </div> <bR> <div> In this course we will examine the foundation of ethics and consider the parties to whom the practitioner owes an ethical duty.  In addition, we will look at certain ethical yardsticks against which our actions can be measured.  Finally, we will discuss the practitioner's sales methods and sales tools and provide a basis for their audit in ethical terms.</div> <bR> <div> <I><B>The Foundation of Ethics</B></I></div> <bR> <div> In practical terms, ethics is a system or code of principles that directs our actions towards others. Before trying to apply the precepts of any ethical system to the complex and important job of the financial services practitioner, it seems sensible to look somewhat deeper into this system that we know as ethics and understand the principles on which it is based.  Not surprisingly, the foundational ethical standards that apply to the financial services practitioner in his or her interaction with customers or represented companies are the same that serve as the building blocks of the earth's great religions: the <U>Golden Rule</U>.  The Golden Rule maintains that each of us should treat others as he or she would wish to be treated.  <FONT SIZE="3" COLOR="#000000" FACE="Times New Roman" >The Golden Rule is an ethical norm that is an essential element of the dominant religions, as seen in the following scriptures:</FONT></div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Judaism: Thou shalt regard thy neighbor as thyself. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Buddhism: Hurt not others with that which pains yourself.</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Islam: No one of you is a believer until he loves for his brother what he loves for himself. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Hinduism: Good people proceed while considering that what is best for others is best for themselves. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Christianity: Do unto others as you would have them do unto you. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Confucianism: What you do not want done to yourself, do not do to others.</div> <bR> <div> Modeling our actions towards others-our customers and companies, in this case-on what we want for ourselves is not only eminently fair, it is also essential for a civilized society.  Consider the alternative to this precept of fairness.</div> <bR> <div> In a society in which you were the only member, there would be little need for ethics.  You would be the beneficiary of all of its goods as well as the bearer of all of its burdens; there would be nobody eager to share your goods, nor would you be expected to shoulder anyone else's burdens.  It is the fact we don't exist alone-and that goods exist in limited supply while burdens seem unlimited-which makes a system of ethics essential.  Limited goods must be distributed and burdens shared, and that means that we will disagree.  The important question is how that disagreement should be resolved.</div> <bR> <div> There are two fundamental means of dispute resolution: through the use of force and through the use of reason.  Any other way is only a subset of these two.</div> <bR> <div> If I use force to resolve a dispute-by brandishing a weapon or making a threat, for example-I may be able to carry the day, but at what cost?  My use of force has probably destroyed any possibility of an enduring relationship.  The next time a similar dispute arises, my adversary may use a larger weapon, and the result may be different.  </div> <bR> <div> More significant than a future adverse outcome is that, with the loss of the possibility of relationship, the value of my life is sorely diminished.  Since the value of my life is so important to me, force isn't the answer.</div> <bR> <div> However, if I choose to use reason instead of force to resolve disputes and, thereby, promote relationship, what principle is likely to be the most palatable to everyone?  The answer, of course, is the Golden Rule: specifically, I will treat you in the way that I want you to treat me, and I want you to treat me as you would treat yourself.</div> <bR> <div> Assuming that you have a healthy self-image and, therefore, treat yourself well, the Golden Rule becomes the most rational method of dispute resolution.  Taken to the next step, it is the very core of fairness and the fundamental element of professionalism.  It is this fairness that is the basic character of any viable system of ethics.   </div> <bR> <div> <I><B>The Nature of Compliance</B></I></div> <bR> <div> To be unaware of the ethical issues that have plagued the financial services industry we would have had to avoid newspapers, television and the radio.  Certainly everyone is aware of the unethical sales practices for which many of the biggest companies in the insurance industry were successfully sued.  In addition, company analysts' promoting to customers the stocks of companies that they privately disparage in order to obtain more of those companies' business suggests a level of cynicism and nihilism seldom encountered. </div> <bR> <div> It is not surprising, then, that the call for an ethical renaissance has become increasingly loud.  With that call for an elevated level of ethical behavior has come a greater focus on enforceable ethical rules and the need for compliance with those rules.  </div> <bR> <div> When we talk about compliance, we are really talking about particular rules of conduct-in some cases made into law-that are designed to promote the interests of all of the parties to a transaction.  Although it is certainly possible to act in a compliant way without being ethical, there is a direct connection between the two concepts.  If ethics, as the foundation of integrity and honesty, gives us optimum standards of conduct, compliance gives us minimum requirements of conduct.  If ethics tells us what we ought to do, compliance dictates what we must do.</div> <bR> <div> So, although compliance certainly has its basis in ethics, it is not the same thing.  The person who acts ethically does the right thing; the person who is compliant stays out of the courtroom.  Ethical or professional conduct beyond what is required by the law is optional with the individual.  Compliance is a legal requirement.</div> <bR> <div> Ethics comes into play with respect to:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The practitioners' sales tools</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The practitioners' sales practices</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">What the practitioner says or fails to say</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">What the practitioner does or fails to do</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The practitioners' interaction with clients or prospects</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The practitioners' relationship with his or her company or companies</div> <bR> <div> Although avoiding unethical sales practices is certainly important, ethics includes far more than just sales practices.  It extends to all these areas.  One of the important results of increased ethical awareness is a favorable change in the public perception of the insurance agent and the stockbroker.  </div> <bR> <bR> <div> <I><B>Professionalism & the Industry's Public Image</B></I></div> <bR> <div> The public image of the insurance and investment business has been affected significantly by the sensationalism of the misleading sales practices affecting many of the largest insurers and brokerage houses.  The unfortunate truth is that these unethical sales practices are practices that many practitioners, representing many companies, have used in the past.  As we continue through this course, we will examine many of these practices in considerable depth-practices whose common thread is that they misled the customer.  We will look at the use of such terms as "private pension," "vanishing premiums" and a number of others.  Each of them has a common element of deception-an element that stands in direct opposition to the concept of professionalism.</div> <bR> <div> When we think of a profession, such as medicine or law, we can usually find three components that are necessary for an occupation or business to be considered a profession.  </div> <div> <I>                    </I></div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Specialized knowledge</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">A "service before income" outlook and</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">A code of professional ethics</div> <bR> <div> While any profession may have additional requirements for membership, every profession has each of those three components.  These professions encompass a body of specialized knowledge, a "service before income" outlook and a code of ethics.  This code is what governs their actions and against which they are measured, just as compliance requirements and our own code of ethics govern ours in the financial services business.</div> <bR> <div> The mantle of professional in the eyes of the client comes at a price.  The consequence of being considered a professional as opposed to a seller of insurance policies or securities is the greater potential liability imposed by the courts.  If we recognize that achieving the status of professional results in our greater liability, we need to ask whether it is worth the greater liability.  Not only is the label of professional worth being held to a higher ethical standard, it is essential to the financial well-being of the practitioner.</div> <bR> <div> There is no question but that competition is an economic fact of life.  If you are able to make and sell something cheaper than your competition, you may have an ever-increasing share of the market.  Although we often hear about the increased competition for the insurance dollar from banks, brokerage companies and other financial institutions, we hear much less about the competition from a source that is far more difficult to deal with-the alternative distribution systems that insurers are experimenting with.</div> <bR> <div> Insurers have determined that the agency system is an expensive way to sell insurance, regardless of whether it is life insurance, health insurance or property & casualty insurance.  However, the agency system continues to exist because it is also the most effective system.  What happens, however, when the public no longer feels the need for an insurance agent?  </div> <bR> <div> The answer should be obvious; insurers will move quickly to those less expensive alternative distribution systems. Unless agents and other financial services practitioners become more professional and the public perceives a greater benefit from the practitioner's participation in the sale, the agency system may die.  Even if there were no other reason for agents to be in the forefront insisting on an ethics-driven profession this would be enough. </div> <bR> <div> To summarize the role of ethics and compliance in the financial services transaction:  </div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">It is a body of rules of conduct that promote the interests of all parties to the transaction;</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Although distinct from ethics, compliance has its foundation in an ethical system;</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The rules of compliance provide minimum conduct requirements while ethics provides optimum guidelines;</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The rules of both ethics and compliance apply to the sales tools and practices of the agent;</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Ethics extends to interaction with the client or prospect and with the company or companies that are represented;</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Changing the public image of the financial practitioner to one of a professional requires, among other things, adherence to a code of professional conduct;</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Although professional status carries with it a cost in increased liability for life insurance agents, it may also help ensure the continuation of the agency <FONT SIZE="3" COLOR="#000000" FACE="Arial" >distribution system.</FONT></div> <bR> <bR> </td> </tr></table></body>