2019 CFA level 3 finquiz curriculum note, study session 3, reading 6

Professionalism in Investment Management
1.

INTRODUCTION

Professions maintain trust by establishing codes and
setting standards that put a framework around ethical
behavior and technical competence.
2.

Professions are defined as an occupational group with:
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specific education,
expert knowledge, and
a framework of practice and behavior that
underpins trust, respect, and recognition.

Most professions emphasize:
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an ethical approach,
the importance of good service, and
empathy with the client.

Driving forces of a new profession include governments
and regulators which encourage the formation of an

ethical relationship between professionals and society at
large.
One difference between professions, on the one hand,
and craft guilds and trade bodies, on the other hand, is
that the former are required to uphold ethical standards.
In addition, trade bodies do not have a mission to serve
society or set and enforce professional conduct rules for
practitioners.

Professions

Professions can also widen access to services and
support economic activity by encouraging trust in the
industries they serve. A profession that earns trust will
have greater flexibility to manage their own affairs and
will allow members of the profession develop service
models to benefit the client community.
Professions are client focused
Professionals should:
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place the integrity of their profession and the
interest of clients above their own personal
interests,
act in the best interests of the client, and
exercise a reasonable level of care, skill and
diligence.

Fiduciary duty: the obligation to deliver a high standard
of care when acting for the benefit of another party.
To enforce ethical awareness and improve the quality of
client service, most employers encourage members to
be members of a relevant profession.
Professions have high entry standards

2.1

How Professions Establish Trust

Characteristics which increase the confidence and
credibility in professionals and their organizations:

Membership of a profession is a signal that a professional
will deliver high-quality service of a promised standard
going beyond their academic credentials.

Professions normalize practitioner behavior

Professionals possess a body of expert knowledge

Professionalism is underpinned by codes and standards
developed by professional bodies. Regulators support
professional ethics and recognize the framework for
ethics provided by professionals. Codes and standards
can be complementary to regulations.

Knowledge, developed by experts of a profession, is
made available to all members of a profession which

helps them work effectively and ethically and is based
on best practice.

Governments support professions due to the role played
by professionals in helping the public.
Professions provide a service to society
Professionals should go beyond codes and standards by
advocating for higher educational and educational
standards in the industry, individually and through their
companies.

Professions encourage and facilitate continuing
education
Most professional bodies require that a specific amount
of new learning is undertaken each year to keep up to
date with changes in technology, standards of ethical
behavior, in services that can be offered, and the legal
and business environment in which services are being
rendered.

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Reading 6


Reading 6

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Professionalism in Investment Management

Continuous professional development: is the process by
which professionals undertake new learnings. This
process may be segregated into different types
competencies and types of learning activity.
Any training and education undertaken by professionals
will increase the value of human capital which
contributes to economic growth and social mobility.

Professions encourage the engagement of members
Professionals should mentor and inspire those who have
or are willing to enter into a profession. Professionals
should be willing to volunteer to advance the profession
engaging with peers to develop expertise and ethics.
Professionals should also volunteer to educate new
generations in ethical knowledge and ethical decision
making.

Professions monitor professional conduct
Members of a profession must be held accountable for
their conduct to maintain the integrity and reputation of
the industry. This is achieved by monitoring and
imposition of sanctions on members.

2.2

Professions Are Evolving

Professions are evolving due to:
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Professions are collegial
Professionals should respect the rights, dignity, and
autonomy of others.

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greater transparency and public
accountability is forcing professions to
change and
technology opening up possibilities for new
ways of working.

Professions are recognized overseeing bodies
Many professions are not-for-profit organizations with a
mission which emphasizes excellence, integrity, and
public service. An overseeing body typically ensures that
professionals strive to remain competent.

3.

Currently, the investment management profession meets
most, but not all, of the expectations of a professional:
Globally, there is a trend to require examined
entry to practice investment management
and maintain competence but few
professions practice all expected attributes.

The investment management profession has become
increasingly globalized due to the opening up of capital
markets. Regulatory coordination across borders and
emergence of technology are contributing to this
globalization.
3.1

Effective professions continue to develop their role to
account for changing best practices.

Professionalism In Investment Management

Public understanding of the investment profession’s
codes and practices is still developing. Recognition by
employers and regulators lags established professions.

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Key processes of a profession’s responsibilities need to be
reviewed by a professional agency or independent
public body.

Trust in Investment Management

Investment professionals are trusted to maintain a
standard of knowledge and apply that knowledge with
care and judgement. Investment professionals are also
expected to have:

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superior financial expertise;
technical knowledge; and
knowledge of applicable laws and
regulations.

Professionals should also seek to disclose risks, conflicts,
and any fees involved to clients in a way to serve their
best interests.
Compliance with of ethics and standards of professional
conduct is essential for investment professionals and
practice should be guided with care, transparency, and
integrity.
To maintain trust, investment management firms and the
investment profession must be interdependent.
Regulations and standards set by professional bodies
may differ from and conflict with those of employers and
regulators.
The investment management profession can deliver
more value to society when higher levels of trust
combined with better capital allocation lower
transaction costs and help meet client objectives.


Reading 6

Professionalism in Investment Management

CFA Institute as an Investment Management
Professional Body

3.2

In addition to US public company standards, the CFA
Institute Board of Governors has resolved to implement
US not-for-profit leading practices.
Mission of CFA Institute: “to lead the investment
profession globally, by promoting the highest standards
of ethics, education, and professional excellence for the
ultimate benefit of society.”
CFA Institute candidates and members must meet the
highest standards established by CFA Institute, regulators
or employers. When client and market interests conflicts,
the Institute requires the duty to market integrity should
be the overriding obligation.
The CFA Institute collects knowledge from practicing
investment professionals, conducts rigorous
examinations, and ensures practitioner involvement in
developing codes and ethics.

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The CFA Institute ensures that candidates have mastered
the core knowledge, skills, and abilities that are
necessary and applied by investment professionals. The
Institute also participates in new research and its
dissemination as well as generation of financial ideas.
Through local societies, CFA Institute encourages

members to interact in local professional communities
and engages them in its initiatives. Membership in a local
society is important for continuing professional
development.
CFA Institute additionally requires members and
candidates to:
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adhere to Code and Standards;
annually sign a statement attesting to that
continued adherence; and
maintain and improve their own professional
competence as well as those of others.

Practice analysis: is the process of continuous interaction
with investment management professionals to ensure
that their body of knowledge remains current and
globally relevant.
4.

Expectations of Investment Management Professionals

The characteristics and behavior expected of all
professionals include:
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honesty,
integrity,
altruism,
continuous improvement,
excellence,
loyalty, and
respect for colleagues, employers, and
clients.

Extremely high standards, including behavior in public,
but not perfection, is expected of individuals.

Professionals are additionally expected to:
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uphold the reputation of their profession
be responsible, reliable and accountable in
their work
engage in continuing professional
development to update their knowledge
provide independent advice

avoid or disclose conflicts of interest
respect client information, objectivity and
transparency.

Some attributes which are shared by most professions
include the duty to be honest, open in dealings and
obtain informed consent from clients. Professionals
should not abuse their specialized level of knowledge
the possess compared to their clients.
Professionals should disassociate themselves from
violations of laws or regulations. Individuals are
encouraged to act up themselves in response to a
concern even if they are unable to alter the conduct of
others.
When encountering ethical dilemmas, investment
management professionals should carefully consider the
facts of each issue and assess the implications for clients,
their employers, and their own career.
Investment professionals should be able to understand
and apply judgment relating to the code and standards
of their professional bodies to their loyalty to their
employer. The CFA Program ethics and professional
standards guide investment professionals in the case of
conflicting interests.
Professionals may raise a concern with the following:
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colleagues or contemporaries
supervisors
a firm’s compliance or ethics officer
a mentor outside the firm


Reading 6

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Professionalism in Investment Management

a professional body hotline
senior individuals in the firm
a firm’s whistleblowing line
a regular or law enforcement agency

5.

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consumerism (most influential social force
today),

regulation,
globalization,
demographics, and
technological innovation.

Regulation has helped raise professional standards by
making them a requirement for practice.
Globalization has allowed for common investment
practices resulting in harmonization of investment
practices and regulation.
Challenges of globalization:
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Large firms consolidate in developing their
own standards and codes which conflict with
those of individual professional bodies
Standards of market integrity and client
interest may vary in the countries and regions
in which a firm operates

Rapid advancements in technology is the biggest
challenge faced by the investment management
profession. Examples of the effects of technology on the
investment management profession:
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Professionals should seek to raise an ethical dilemma
issue internally as a starting point. In seeking the advice
of others, professionals should seek confidentiality.
Protecting the client may take priority over an individual
raising concern.

Challenges for Investment Management Professionals

Investment management faces challenges from:

Rapid advances in computer power alter the
definition professional expertise and how it is
applied to serve investors
Digital systems may replace or enhance
investment professional’s functions
Important functions of the investment
profession such as index replication and risk
management are being automated.
Artificial intelligence (AI) developments

Technological developments demand that the
investment profession evolves through continued
education programs. In addition, new codes of practice
and standards should be developed which recognize
the growing intersection between human and artificial
skill.

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