Applied Ethics and Behavioural Finance in Client Work
Ethical frameworks in practice
Professional ethics in advice rests on integrity, objectivity, competence, confidentiality, fairness and professionalism. Codes of ethics typically add enforceable standards: comply with the law, act with independence, avoid or manage conflicts, ensure advice is appropriate, and maintain competence through continuing education. Questions test whether you can recognise an ethical issue before it becomes a compliance breach - for example, accepting a supplier-funded trip, recommending an in-house product without comparison, or continuing to advise a client whose circumstances you no longer understand.
Behavioural finance concepts you must name
Know the main biases and, critically, their advice implications:
- Loss aversion - clients feel losses roughly twice as strongly as equivalent gains; leads to over-conservative portfolios and panic selling.
- Anchoring - fixating on a purchase price or past index level.
- Confirmation bias - seeking information that supports an existing view.
- Recency bias - extrapolating recent market performance.
- Overconfidence - overestimating skill, understating risk, trading too much.
- Mental accounting - treating money differently by source (e.g. a bonus versus salary).
- Status quo bias and default effects - inertia keeps clients in unsuitable legacy products.
- Herding - following crowd behaviour.
Traps
- Naming a bias without stating the mitigation. The exam wants the response: education, framing, pre-commitment rules, diversified defaults, cooling-off before large decisions, documented rationale.
- Assuming disclosure of a conflict is ethically sufficient when the conflict should be avoided.
- Confusing the adviser's own biases with the client's.
Rule of thumb
Use the mirror test plus file test: would you be comfortable if the client read the file, and would a peer reach the same conclusion? If either fails, escalate.
Worked example. A client insists on selling all equities after a 15% fall. Recognise loss aversion and recency bias, reframe in terms of the goal and time horizon, show the cost of crystallising the loss, offer a partial de-risking compromise, and document the discussion and the client's informed instruction if they proceed.