The Ethics of Investment Brokers

Investment brokers walk a tight and precarious line. On one hand, their income depends on how many deals they complete, and on the other hand, they need to be honest and forthright with their customers, those that are called "the investors" . In fact, the question might be asked, "who are their customers, the buyers or the sellers?". And to whom is their allegiance when selling, and ultimately when things go wrong? It is in this vein that the ethics of investment brokers is important and crucial to the success of the securities system.

One of the biggest problems investment brokers undertake is deciding which investments to recommend. Given two separate deals with varying commission structures, will the brokers favor the deal that is in the best interests of the client, or will the brokers choose the deal that provides them the greatest earnings? Typically, awards and bonuses are granted based on dollar volume, so how much they earn becomes a pivotal point in their modus operandi. And even when they wish to appear impartial and allow clients to make their own decisions, have they really remained on the sidelines? Or, is there a conflict of interest because they have in some way encouraged clients to choose the investment most favorable to the brokerage house or the individual investment broker?

Furthermore, the concept of ethics extends to the actual advertising and promotion of the firm its brokers, and the products. Are brochures and sales aids misleading or do they disclose all the necessary facts about a particular investment? When talking to clients, do brokers "tweak" the truth and omit various details, or do they present the investment as is? In sales, there is always the tendency to candy-coat everything, and one might ask if this is ethical? Most would answer that it was okay if the returns are significant and tangible, but when something goes awry, that is when the concept of ethics crops up. To what level is it acceptable to withhold information or make things appear rosy? What is the defining number, and what is the severity of the tweak?

Insider trading is a difficult issue to bear and directly impact the ethics of investment brokers. Whether they deliberately use the uncovered information to their advantage or they keep quiet about certain factors remains to be seen. Is it reasonable to expect someone to forget what they learned and sell something that might be unfavorable, knowing that the outcome could be substantially different if they use the information?

Ethics will also depend on the individual broker. A person with strong moral values will conduct business in an entirely different manner than someone who follows the crowd. For example, if an over-zealous manager has decided that volume should be ramped up at any cost, do the subordinates follow as required by management, or do they decide themselves that the route prescribed is not ethical? Many people, albeit, understandably so, follow the instructions of management and ultimately the firm for fear of loss of employment.

Indeed, the public should be able to assume that the conduct and the ethics of investment brokers meet the highest standards. It is for this reason of expectations that the financial and securities industry is regulated, and thus, information about brokers and investment firms is public knowledge, readily available for the asking.