how to get the most knowledge from this course! enhance the learning and knowledge process, this...

To enhance the learning and knowledge process, this course uses learning strategies designed to increase your comprehension and retention.

The format includes traditional headings and subheadings, as well as highlighting and text borders to bring attention to critical concepts and facts that will help you pass the exam.

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3. Case Studies: Some of the more variable concepts will be illustrated using case studies. These case studies are designed to reinforce the concept being discussed and it is recommended that you take the necessary time to digest the points made within the case studies.

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How to Get the MostKnowledge from This Course!

A Continuing Education Course

Ethics…

A Personal & Professional Code of Conduct

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Course Objectives

• Increase the ethical awareness, professionalism, and competency of financial professionals. • Inform new representatives and/or remind veteran professionals about ethical principles and rules associated with those principles through review and further exploration as it relates to practical and everyday realities in the financial planning environment. • Increase professional’s awareness of and reinforcement of specific knowledge about ethical principles and rules as they relate to their personal work with individuals and the wider marketplace for all • Clarify the fundamental differences between personal and regulatory principles and rules. • Explore specialized situations of everyday applications that occur wherein the appropriate application of a personal code of ethics lay such as borrowing, loaning, and representing clearly issues that have historically been an issue requiring specific action. • Provide a basis for professional guidelines for ‘rightness’ “wrongness” in their regular professional financial planning operations. • Examine approaches that include adherence to a personal code of ethics and professional conduct. • Engage financial service professionals in the subject matter in an interesting, thoughtful, and compelling way, style, and approach that makes education on their ethical practice operation a positive use of their time and an enhancement to their professional growth.

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Overview : This course was designed, constructed and written to provide continuing education for financial professionals in the area of ethics and professional conduct with special attention to principles and guidelines; as well as discussion and education on practical applications over the financial planning landscape. It acknowledges and includes an examination of professional conduct, behavior, and sound business practices in working with individual clients, as well as adhering to high standards for the benefit of the maintaining a positive and professional perception within the population as a whole. It also highlights philosophy and everyday guidelines that are fundamental components of the professional’s mission and objectives. The course is comprised of 2 sections and 13 subject segments with 40+ pages of text along with additional notes and summary pages to enhance the value of the information as well as to improve recall beyond the course. Chapter reviews are synthesized by the unique use of “Notes”. This is intended to facilitate the retention of key elements as well as to confirm mastery of the material content. It has been constructed to provide the aspiring, newest, and veteran professional with a format for gaining new/renewed insight into this critical area for professional financial advisors as well as current info and rules pertinent to this area of overall competency, professionalism, and expertise.

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Ethics: A Personal & Professional Code of Conduct

Table of Contents Welcome and Words.……………….… …………………..……….………..v Section 1 - Personal Professional Ethics Principles & Rules…………………………………………………….….…….1 Integrity ..........................................................................................…..…. 4 Objectivity ................................................................................…............. 7 Competence ......................................................................................…… 9 Fairness ...............................................................................................….11 Confidentiality ...................................................................................….…15 Professionalism............................................................................…......... 18 Diligence………………………………………………………………….....…..22 Borrowing……………………………………………………….……….………26 Section 2 – Regulatory Ethical Conduct The McCarran-Ferguson Act………………………………….……….………28 Misrepresentation, Discrimination, Rebating, Commingling…………………………………………………….………………29 Commission Sharing, Record Keeping, Replacement, Conflicts of Interest………………………………………………………….……….….……33 Trade Practices..……………………………………………….……….………38 Notes & Summing it up….………………………………………………….….41 Noteworthy Review 42

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Welcome and Words Your Ethics…A Personal and Professional Code of Conduct course was designed, constructed and written to provide you with continuing education in the area of ethics with special attention to the various components and issues specific to the world of ethical approaches and behavior in developing your practice and positive perception in the marketplace with each person you affiliate with, perform services for, and influence the population as a whole. It acknowledges the elevated standards of conduct that are expected of professionals and includes an examination of the key principles and guidelines associated with those responsibilities as one goes about working within their profession for the financial benefit of others. It explores and highlights the practical application of the important areas that are fundamental components of broad ethics arena. It also acknowledges and includes examination of professional conduct, behavior, and sound practices in working with individual clients as well as adhering to high standards for the benefit of maintaining a positive and professional perception within the population as a whole. It also highlights philosophy and everyday guidelines that are fundamental components of the quality professional’s mission and objectives. Your course is comprised of 2 sections and 13 subject segments with 40+ pages of text along with a notes and summary section to enhance the value of the information as well as to improve recall beyond the course. Besides the goal of acquiring additional credits toward your continuing education requirement, it is our hope that you will acquire a new level of competency and insight into this highly critical area of ethics…. As time goes by, the ethical landscape and individual’s interpretation and practical applications change with respect to it. Program changes, content updating, and course program availability are constantly being assessed, updated, and changed. Yet some things are fundamental and seldom, if ever, change. Ethical behavior and ethical fundamentals are basic and this has not changed over time. Our future and the environment that we will operate in depends on everyone adhering to higher levels of moral, ethical standards and practices. Whether you are a newer or a veteran professional, we’re confident that you will gain new insight into this critical area for professional financial advisors as well as brush up on current info and regulations pertinent to this area of your expertise. Chapter reviews are synthesized by the unique use of “Notes”. There are a few review questions, too! This is intended to facilitate the retention of key elements as well as to confirm your mastery of the material content.

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The material has been constructed to provide the aspiring, the newest, and the veteran professional with a format for gaining new/renewed insight into this critical area for professional financial advisors as well as review of the current info and rules pertinent to this area of overall competency, professionalism, and expertise. Your course text is presented in two focused areas…Personal Ethical Professionalism and Regulatory Ethical Conduct. The personal portion of your text speaks to straightforward principles that differentiate highly qualified and high quality professionals from others. The regulatory portion outlines and discusses those areas of ethical conduct specifically referred to in the legislative regulations. Both, when combined, provide a comprehensive basis for client-centered professional behavior and a basis for longer-term client building success.

Words Words are the way we communicate and clarify that which we want to tell others. The title of this course has words that were carefully and thoughtfully chosen to describe and illustrate the keys to this text. We take a brief look at them in the following: The Webster’s “Unabridged” Dictionary defines…

• Code as “kod”, n. 1. any systematic collection of the existing of a country, or of

those relating to a particular subject: the Civil Code of France. 2. Any system or collection of rules or regulations: a gentleman’s code of behavior.

• Ethic as “(eth’ik n.) 1. The body of moral principles or values governing or

distinctive of a particular culture or group: the Christian ethic; the tribal ethics of the Zuni 2. A complex of moral precepts held or rules of conduct followed by an individual: a personal ethic – adj. a personal ethic”.

• Ethics as “(eth’iks n.pl.) 1. a system of moral principles: the ethics of a culture.

2. the rules of conduct recognized in respect to a particular class of human actions ie, a particular group, culture., etc: medical ethics: Christian ethics. 3. Moral principles, as of an individual: His ethics forbade betrayal of a confidence. 4. (usually construed as sing.) that branch of philosophy dealing with values relating to human conduct, with respect to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such actions. syn. moral

• Professional as (pro’fesh’ a nel) adj. 1. following an occupation as a means of

livlihood or for gain. 2. pertaining or appropriate to a professional. 3. engaged in one of the learned profession: a professional man. 4. a person who makes a business of an occupation, practice of an art or sport in which amateurs engage for amusement or recreation.

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• Conduct…………

• Responsibility as (ri spon’sabil’i tee) 1. the state of or fact of being answerable or

accountable. 2. a particular burden or obligation upon one who is responsible. syn. answerability, accountability.

• Aspiring as (a’spi’ring) v. 1. to long, aim, or seek ambitiously; be eagerly

desirous, esp. for something great or of high value.

Noteworthy:

Words – I will learn about, fully understand, and use words appropriately and

accurately in all my communication with others.

Section 1 - Personal Ethical Professionalism

Ethics Financial professionals have a distinct obligation of fiduciary responsibility towards the people they represent in the insurance industry. There is a high level of trust placed in the agent by consumers and many of their decisions are made and based solely on the statements and representations made by the insurance agent. This trust placed in the agent reflects the consumer's lack of knowledge in the areas of insurance products and practices. The agent, on the other hand, has the knowledge and expertise to assist the consumer in making decisions in these fields and should not abuse their superior position. In order for the insurance industry to continue to enjoy this trust relationship with the consumer, it is necessary for all agents (new and veteran) to periodically re-dedicate themselves to upholding this hard won trust. Only through the careful nurturing of this relationship by all agents will the insurance industry as an institution continue to prosper and grow.

“Principles” and “Rules” We’re going to take a close look at several principles so we have a better handle on the bigger picture when it comes to highly ethical personal behavior and what that entails. Principles are statements expressing, in general terms, the ethical and professional ideals that agents are expected to display in their professional activities. As such, the principles are “aspirational” in character and they are intended to provide a source of guidance for you. Rules provide practical guidelines derived from tenets embodied in principles. As such, rules describe the standards of ethical and professionally responsible conduct expected of financial professionals in particular situations. Words are important and their meanings add more to our appreciation of the way they are used and what they embody for our deeper sense of understanding. I’ll be identifying key words that apply to the segments of our discussion as we go along. Here’s what Webster in his dictionary says about principles and rules. Principle as (prin’ se pel) n. 1. an accepted or professed rule of action or conduct: a person of good moral and ethical principles. 2. a fundamental, primary, or general law or truth from which others are derived: the principles of modern physics. 3. fundamental doctrine or tenet; a distinctive ruling opinion 4. Principles, a personal or specific basis for conduct or management: to adhere to one’s principles 5. guiding sense of the requirements and obligations of right conduct: to adhere to one’s principles

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Rules as (rools’) n. 1. a principle or regulation governing conduct, action, procedure, arrangement, etc.: the rules of chess. 2. the code of regulations observed by a religious order or congregation: the Franciscan order. 3. the customary or normal condition, occurrence, manner, practice, quality, etc.: the rule rather than the exception With this in mind, let’s get started with what we are confident will be of exceptional benefit and importance for you. In approaching the subject of ethics, we know that it is a very broad area that has both general premises and tenets as well as more specific pieces that come into play as you encounter individual situations while working with your clients. They are all unique and all have very specific needs and wants for themselves personally and for their families for the future. The more general tenets and guidelines are referred to as the principles. They express for us, as professionals, what we know are our responsibilities to our current clients, our future clients, to our colleagues, to our and other’s employers, and to the public as a whole. In specific, for our course, they apply to you and all other agents. They provide guidance for all of us and others as we go about providing professional analysis and solution services. Let’s take a look at the principles, one by one. There are several we will use as a framework for outlining the key areas of a personal code of ethics and professionalism in our conduct and behavior.

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Noteworthy:

Principles and Rules are the foundation of personal Ethics and professional

conduct.

Principles & Rules Checkpoint Review

• Define ‘Principle’ and ‘Rule’ in your own words.

• How will each of these changes enhance the way you go about your business?

Notes______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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“INTEGRITY” Integrity as (in teg’ri tee) n. 1. soundness of and adherence to moral principle and character; uprightness; honesty. 2. the state of being whole, entire, or undiminished: to preserve the integrity of the empire. 3. a sound, unimpaired, or perfect condition: the integrity of the text: the integrity of the ship’ hull. All of us have been in situations where people have put their trust and confidence in us, both in our professional encounters as well as in our personal lives. In these cases, we have the ultimate responsibility to our clients and the public at large to honor that trust by conducting all our actions and dealings with our utmost integrity. We, like others, know intuitively what is right and what is wrong in any given situation. We rely on each other to maintain honest operation and on our own personal dedication to unshakable, unwavering personal integrity. We all know what is right and just. And, each of us relies on what we know to be the right thing in every situation. Sometimes it may appear to be a gray area, but things become less and less gray as we lay integrity alongside the specific situation. In situations where our personal gain and personal advantage are a potential factor in the equation, we being integrity minded professionals should consistently err on the side of what is in the clients best interest, their personal gain, and their advantage instead. Good news travels fast, but bad news travels even faster!

What about those occasions where an innocent error happens? We know that these things happen and even to those of us who have the highest degree of integrity in everything they do. When this arises or comes to light, the high integrity person acknowledges the error, apologizes for it, and immediately takes steps and action to fix it. The same goes for situations where differing opinions are legitimate and where those opinions may give rise to an integrity issue. Suffice it to say that there are letters of the law when it comes to ethics as well as the spirit of the laws of integrity. The key is whether the error or situation was knowingly deceitful or a compromise of one’s principles of honesty and integrity. This sheds light on the issue that seems to always create difficulty in a world that wants everything in black and white; when, in fact, we humans are not perfect all the time. The key is the knowledge behind and the motive behind the error. What we do about it, if it should happen, is the important thing. This is a specific situation involving the principle of integrity. In fact, there are all kinds of specific situations that we encounter every day that are situations that require more particular guidelines for integrity within integrity sub-categories.

Integrity

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Integrity is not just a philosophical principle. It has real specific applicability to the every day issues and practices that we find ourselves involved in during the course of our marketing and our handling of our clients’ money, to name just a few. Misleading advertising is a “no-no” as you would expect. We shouldn’t make ourselves out to be something that we are not and we need to be careful that we don’t overstate the level of our competency. A more subtle aspect of this area is in regard to misstating or overstating the capacity of the firms that some of us work for in what it can do for our prospects and clients, as well. The principle of professionalism speaks to another activity that we all are engaged in during the course of the year…promotional activities and responsibility in advertising. There have been situations where people who give speeches have introductions that sound better than what their real qualifications actually are. And, some authors of articles, books, and seminar content have been known to make some misleading and materially false communication to their audience and the public at large. We also need to address other simple ones like lying, cheating, and stealing to use the layman’s terms for them. Those are pretty obvious to us all. When they are outright, they’re clear. When they are shrouded in subtle acts they become deceit, fraud, and misrepresentation. We think most often about these things applying to our clients, but they also should be considered in all dealings with our employees, our employers, legal and government officials, and just people we are in contact with every day, in general. We have a number of situations where our profession puts us in a position of direct financial trust. We are exhibiting integrity when we do simple things like keep accurate records of all our financial dealings with our clients and the handling of their assets. We act in relation to the authorities that we have professionally and through the instruments that grant us specific legal authorities like powers of attorney and trusts. Providing reports to our clients, as a matter of course when they request them, is a key ingredient in maintaining full disclosure during the planning and implementation processes. Not commingling any funds of our clients with our own is pretty obvious, but care in commingling several of our clients’ money is ok if we keep very detailed records as we go about servicing their collective financial advantage through the service in those regards that we provide. In all cases, a good measure of integrity would be that we treat our clients money and financial affairs as though it were our own or a close loved one’s money, while adhering to all legal regulations in the process”.

Integrity

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Noteworthy - I will offer and provide professional services with integrity.

Integrity Checkpoint Review ·

• Define ‘Integrity’ in your own words

• What aspects of integrity have you already incorporated into your practice?

• What will you do differently, if anything, as a result of this re-examination of this area?

Notes______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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“Objectivity” Objectivity (ob’jek tiv’ I tee) n. 1. the state or quality of being objective: He tries to maintain objectivity in his decisions. 2. intentness on objects external to the mind 3. external reality. All of us have come from different backgrounds, went to different schools, have different family histories with different backgrounds, different personal life and financial experiences, different personalities, different philosophies on saving and investing, and varying approaches to providing services to our clients. We are all different and have different preferences and ways of going about things, and ways we process information to make decisions. So, is it for each of the individuals for whom we provide services and do business with. People have a favorite baseball team, a favorite make of car, a preferred news program and channel. In most cases they have made a predetermined decision that their choice is better than the choices of others that do not have the same preferences as they do. So is it also that financial planners may have their own preferences, methods, strategies, etc. that they have incorporated personally over a period of time. What happens when a client is unwilling to accept more risk to meet their retirement financial goals even though they are young and have plenty of time to their retirement? Objectivity requires that we be willing to set aside our own priorities, preferences, and personalities to allow us to be impartial and maintain intellectual honesty when approaching our work with clients, as well as going about protecting the integrity of our work. Outside influences in the evaluation and recommendation phases for a client that are not directly in the best interest of the client need to be avoided. To the extent that our personal biases or preferences are not consistent with the clients, they must also be put aside to make sure we see everything from our client’s perspective and take action on their behalf and be totally to their benefit and way of thinking.

Objectivity

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Noteworthy…

I will be objective in providing professional services to my clients.

Objectivity Checkpoint Review

• Define ‘Objectivity’ in your own words

• What aspects of ‘Objectivity’ have you already incorporated into your practice?


Notes______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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“Competence” Competence (kom’pi tens) n. 1. the quality of being competent: adequacy; possession of required skill, knowledge, qualification, or capacity: he hired her based on her competency as a secretary. 2. Sufficiency; a sufficient quantity. 3. An income sufficient to furnish the necessities and modest comforts of life. 4 legal capacity of qualification based on the meeting of certain minimum requirements of age, soundness of mind, citizenship, and the like. Nobody knows everything. Is that a fair statement? If that’s the case, then how can someone be competent in providing services to every client that they have a financial advising arrangement with? This is a question without a quick answer. You have been advising and doing planning for people for over a decade and have studied constantly over the years as well. You have or will be constantly keeping up to date beyond your continuing education work, periodicals, trade journals, and on and on. Still, you will find yourself running into situations where a part of the situation or case has a component that you are not up to speed on. You’re not alone. It might be reassuring for you to know that there are others in this the industry that are in the same boat as you. It is true also that one is able to be considered to be competent when they have developed, attained, and maintained a level of knowledge and skill that is adequate enough to be able to apply it competently when working for a client. It is also accepted that one is competent when they have the wisdom to know when they are in ‘over their head’ in a particular situation or component of a situation; and they bring in outside specialists in the deficient area to work with them on the case or refer the client to another person who has the specialized knowledge and competency in that specific area. This, too, is competency as well, although many out of ignorance might see this as an indication of overall incompetence, which it is not. Even though someone has earned advanced designations with all its knowledge base acquired and its qualifications satisfied to practice advanced financial planning, there is still a need to continually learn, review, and practice the art and science surrounding the financial arena. We have an ongoing commitment to improve professionally all the time.

Competence

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Noteworthy…

I will provide services to clients competently and maintain the necessary knowledge

and skill to continue to do so in those areas in which I provide services.

Competence Checkpoint Review

• Define ‘Competence’ in your own words

• What aspects of ‘Competence’ have you already incorporated into your practice?


Notes______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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“Fairness” Fairness (fare’nes) n. 1. Free from bias, dishonesty, or injustice: a fair decision; a fair judge 2. Legitimately sought, pursued, done, given, etc; proper under the rules: a fair fight. 3. Syn, unbiased, equitable, just, honest, impartial, unprejudiced, disinterested. Fairness is doing unto others what you would have them do unto you. Pretty simple, huh? Sounds like the good old Golden Rule. Well, it is. Most professionals know that when they treat others in the same fashion that they would want to be treated they will have longevity in their career and are duplicating the essential trait of highly regarded financial professionals. Here’s a principle with broad application, but one that involves one of the most sensitive areas of potential disconnect if not handled properly and professionally in advance and throughout the timeline of a financial advisory situation. Compensation, conflicts of interest, and disclosing fully what a client requires in a consistent and timely manner are the cornerstones in the issue of fairness. First of all, compensation should be fair and reasonable. As we all know, in fairness, the issue of compensation needs to be communicated clearly and with enough detail to make sure our client has a full knowledge of what it will cost to have the benefit of our services if we will be charging a fee. It should be relative to the financial planning services to be performed. And, any additional costs associated should be disclosed if they also require that we implement the plans at a given moment and/or over a predetermined timeline if the implementation takes a longer course. How do you address the amount of time that an initial compensation arrangement and disclosure to the client should be performed? It should be initially offered for a year period and reviewed at least annually. If our client requests an update or re-negotiation of the compensation arrangement in any way, we should allow for it and provide an amended or adjusted schedule as appropriate and as agreed upon by both us and our client. In many cases, the situation surrounding the financial arrangement and implementation may require that the compensation disclosure be in terms of a percentage, approximate dollar amount, or as a range of dollar amounts, etc. The more detail, the better it is for avoiding confusion and unintentional surprises perceived our client after the fact. If we find it necessary to estimate costs and compensation because of the open ended nature that a situation initially requires, these should be communicated clearly along with a clear overview of the basis for any assumptions used in the disclosure.

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And, of course, there is always room for recalculating and re-communicating any changes to the client should the situation change substantially from what was mutually derived, assumed, and agreed upon at the outset. If our initial disclosure assumed that there might be unanticipated situations that could alter the financial engagement in the future, this would be best to have that as part of the compensation disclosure initially and agreed upon up front. In addition, we have the obligation to disclose supplemental compensation arrangements, if any, to our clients, our employers, and to any other business affiliations such as partners, co-owners, etc. We must be sure to disclose any conflicts of interest to our clients. The same goes for any compensation arrangements, in addition, to our employer’s compensation; and any additional compensation arrangements above and beyond those prearranged between any partners or co-owners where those affiliations exist, as well. What about planners who are employees as opposed to being independent? Their employers have overall business objectives that need to be met in order to maintain the viability of their organizations. A professional must be aware of their employer’s objectives and perform at a level to deliver their part of the organization’s objectives. However, this must only be performed to the extent that those objectives are within the law as well as being consistent with your personal code of ethics. In most cases, employers have the same need and desire for their employees to be highly regarded as ethical individuals, while also maintaining their professionalism and record of ethical conduct at all levels across their organizations. Further, it is up to the agent to make sure that they keep their clients informed as to their employment status with any employer, any change to their professional and licensure status; and any arrangements outside their employer, if applicable, that could impact the capacity for the agent to perform at levels expected by the employer and in a manner consistent with an employer’s organizational standards and objectives. Fairness requires impartiality, honesty and disclosure of conflict(s) of interest. This speaks to fairness, even to the extent that it requires a subordination of one’s own feelings, prejudices, and desires. This allows a financial professional to achieve a proper balance of conflicting interests. Finally, fairness dictates that we as financial professionals disclose things that are relevant to the relationship that we establish with our clients. While these items are in most cases obvious and fundamental, they are critical to a professional, ethical, and longer-term relationship with our clients. As you would expect, they include address, business affiliations, professional credentials, licenses held, employer/agency relationships, basic compensation structure, background and qualifications pertinent to

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the services that we are expected to be performed for the client, i.e. philosophy, resume, etc. We also want to make it known right up front to our client (or those that we would like to have as clients) that they are welcome and encouraged to feel free to ask anything they want in any level of detail they would like in relation to compensation at any time.”

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Noteworthy…

Fairness – I will perform professional services in a manner that is fair and

reasonable to clients, principals, partners and employers, and shall disclose

conflict(s) of interest in providing such services.

Fairness Checkpoint Review · Define ‘Fairness’ in your own words

• What aspects of ‘Fairness’ have you already incorporated into your practice?


Notes____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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“Confidentiality” Confidentiality as (kon’fi dan’ tee al’ I tee) n. 1. spoken, written, acted on, etc. in confidence; secret: a confidential remark. 2. Indicating confidence or intimacy; imparting private matters: a confidential tone of voice. 3. Having another’s confidence; entrusted with secrets or private affairs: a confidential secretary. 4. Limited to persons authorized to use information, documents, etc. An agent is bound to act in utmost good faith in the areas of handling the consumers’ financial instruments (including cash) as well as their personal and medical information. The agent will occasionally be privileged to certain confidential financial and medical information regarding their clients. It is important that the agent treat this information with respect and confidentiality. If an adverse underwriting decision is made, often the agent will have to convey this information to the client. She should be aware of the process the consumer can use to determine the source and validity of the information on which the decision was based. Attorneys, physicians, psychiatrists, counselors, and countless other professionals have varying legal and professional responsibilities and protections for keeping their clients’ and patients’ information confidential. We also, as financial professionals, have a responsibility to keep any and all information that is provided to us by our clients private and confidential. This is the case whether or not the divulging or sharing their information actually causes harm to our client. This confidentiality also extends to your employers, as well. Information about the inner-workings, financial data, and information about employees or principals that is not necessary for disclosing to our clients is considered this confidentiality area. Financial professionals many times are partners or principals of financial service organizations and firms. The confidentiality expectations apply in these situations, as well. In fact, an agent should honor this while they are actively involved with their firm as well as afterwards, should they separate their employment or officer/owner role in the future. What happens when a situation arises where an agent finds himself in a situation where he needs to share information with others or another firm in order to implement a financial transaction on behalf of his client? In those cases, we assume that the client has given their permission to share the amount of information required to effectively follow through on the client situation with them and to their advantage. Generally those firms providing transactions or services for your client are also sworn to confidentiality for your client, as well. The key here is that the client will have requested that of you and realize that you would not be able to provide them with the action warranted on their behalf without the ability

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to supply appropriate and pertinent information required by those needed to square away their requests and strategies. That brings up another scenario that might require the sharing of a client’s information. There may be, from time to time, some legal requirements or a legal process that requires an agent to provide information that they have or know about the client. In these situations an agent is required to comply with any legal process requirements and is not in breach of the confidentiality principle in those cases. Don’t forget that in cases where you run into a situation that does happen occasionally when a civil dispute arises between you and a client that the confidentiality protection is altered. If it goes to a civil dispute level you may have to defend yourself against wrongdoing in these types of cases. In that case the information will be the evidence that may have to be presented to illustrate and provide answers to accusations. It is obviously a situation that none of us anticipates, expects, or ever wants to have happen. But, in this world we operate in, these things do happen and the confidentiality issue comes into play in those situations. The safeguarding of our client’s information is something we are all aware of as one of the most significant things that allows for us and our clients to have a relationship that is based on trust and confidence.

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Noteworthy…

Confidentiality – I will not disclose any confidential client information without the

specific consent of the client unless in response to proper legal process, to defend

against charges of wrongdoing, or in connection with a civil dispute between the

myself and my client.

Confidentiality Checkpoint Review

• Define ‘Confidentiality’ in your own words

• What aspects of ‘Confidentiality’ have you already incorporated into your practice?

• What will you do differently, if anything, as a result of this re-examination of this

area? Notes____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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“Professionalism” Professional as (pro’fesh’ a nel) adj. 1. following an occupation as a means of livelihood or for gain. 2. pertaining or appropriate to a professional. 3. engaged in one of the learned profession: a professional man. 4. a person who makes a business of an occupation, practice of an art or sport in which amateurs engage for amusement or recreation. Professionalism as (pro’fesh’ a ne liz’em) n. 1. Professional character, spirit, or methods 2. The standing, practice, or methods of a professional, as distinguished from an amateur. There is an old phrase that states that ‘one plus one equals three’. In regard to this discussion, this suggests in a unique way the underlying philosophy that when one agent works hand in hand with another agent to the greater advantage of a client, the client benefits far greater than what they would have through merely the individual service from each agent alone. This working together in harmony has also been referred to as ‘synergy’. This is a prime example of a professional approach where the client’s best interests far outweigh the individual needs of a provider of services to them. Peoples’ financial needs, desires, and goals are the most important and far-reaching part of their lives. Because of the critical nature and importance of the professional services that we as financial professionals provide, there are even greater responsibilities to be shouldered by us to make sure we behave with dignity and courtesy to all of the people who rely on us and use our services. In addition, the more we all work together as individuals with the common purpose of delivering exemplary professionalism, we all win; especially in the hearts and minds of those in the public who want and need this high level of professionalism in regard to their financial affairs. And, the more we recognize the effect we have as part of the larger group of dedicated professionals, fellow professionals, and others in related professions, the more we enhance this positive public presence to the benefit of all. Together, we as individual financial professionals have an obligation as well as the opportunity to create widespread demand for who we are and what we can do for increasing numbers of people in the broader marketplace. High quality agents recognize this and see it as a beacon for those who want to be part of the vision that can be realized through the combined efforts of the larger body of today’s ethical professionals. This mutually beneficial focus on maintaining a high degree of professionalism is not always easy and should not be taken lightly. There are many parts to this puzzle and it is good for us to continually explore this vital area rather than just espousing the theory and philosophy. Many of the fundamentals of ethics speak to specific areas of professionalism that we must be aware of and follow in order to act on and continue to make the vision a reality.

Professionalism

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We all should feel comfortable and confident that ‘inter-inspection’ of our own agent affiliation is where the responsibility should fall. Otherwise, others outside the ethical agent framework will make the policy of professionalism for us and enforce it. It is always better to have those measures in place that are designed to have things done right by all so that there is no need for outside intervention. Protecting each one of our reputations for honesty and trustworthiness is something I am confident that all of us are concerned about. We want to be part of a system that pays attention to this and has a process in place to deal positively with it. We may be called upon as a consultant or expert witness, arbitrator, or other legal body participant and be privy to knowledge about an agent through that involvement. Information learned as an arbitrator must usually remain private regardless of the nature of the information. You may have been previously in a competitive situation and wanted to arrange things to beat the competition. It’s your nature to want to win whenever you play sports or compete with others in general; and that seems to flow over to business situations, as well. Before you became an agent you might have tried to position yourself to win no matter what. But, you have pledged and have a commitment to uphold the principles and rules for the benefit of your own practice. And because you see the value of professional dealings for the benefit of agents in general, you took the high road and you felt a lot better about that than you would have by just getting the business. For most of us, this is not something that we are freely willing to admit. But, we have a great respect for you doing the right thing. You might have even found that taking that tack was a lot easier than taking the low road. There is plenty of good business out there and invariably more of that will come to you and all of us if we go about it in line with the a personal code of ethics. Up to now, we have been talking about indicators of dishonesty and lack of trustworthiness. What about if we become aware of knowledge that we suspect is an indication of illegal activity on the part of another agent? In that situation, you will do the right thing by going to the person’s superior within their organization directly and make them aware of the situation so that they could take the necessary steps to deal with their representative’s quickly, take the necessary investigative steps, and to take appropriate action. This is a situation where the action goes first to that person’s supervisors, partners, or co-owners so that immediate action can be taken at that level. This brings up the area of attention to the laws that we must all abide by. We must observe and comply with all laws and regulations applicable to us in the course of providing our services. These include the laws of governmental agencies and all other authorities that apply to the specific areas of our activities.

Professionalism

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All these things go along with the commitment that we should have made to ourselves that we will not be involved in anything that reflects negatively on ourselves or our industry and our profession as a whole. It’s actually pretty simple and straightforward, isn’t it? To follow through on this a bit more, it is a good note to be reminded of the fact that we should not be involved in any professions or provide any services that we are not fully and currently licensed for and fully qualified to perform. We’ll explore these areas later in the second section of your course text. Professionalism also comes in the form of simple things like making sure that we take action quickly to return any papers, forms, documents, and records to our clients when we promised to have them back in our clients hands or whenever the client requests for their return. Sometimes the little things are the big things in the overall spectrum of professionalism.

Professionalism

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Noteworthy…

Professionalism – My conduct in all matters will reflect credit upon the profession.

Professionalism Checkpoint Review

• Define ‘Professionalism’ in your own words

• What aspects of ‘Professionalism’ have you already incorporated into your practice?


area? Notes______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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“Diligence” Diligence as (dil’ I jens) n. 1. constant in effort to accomplish something; attentive and persistent in doing anything: a diligent student. 2. done or pursued with persevering attention; painstaking; a diligent search. 2. constant and earnest effort to accomplish what is undertaken; persistent exertion of body or mind. 3. care; caution pertaining or appropriate to a professional. syn. industrious, assiduous, sedulous, occupied, indefatigable, untiring, tireless, unremitting The final principle for consideration is one that pays attention to our obligation to perform the services that we provide in a prompt and conscientious manner; one that is within the timeline that we promised and/or that was agreed upon with our client at the time we entered into a financial advising situation with them. We serve them well by the expertise, guidance, and implementation in their financial goal management and attainment process. In thinking about this, you may recall all the many times that you have needed, requested, and entered into a business relationship with countless providers that were in service industries from a number of different areas that you needed in your personal and family life. They ranged from and included lawn services, auto mechanic, plumber, electrician, dentist, doctor, property and casualty agent, real estate broker, dry cleaner, etc., etc, etc. You remember in a highly positive way those who did what they said they would do, did it right the first time, did it in the time frame that they said they would do it, and charged an amount that was fair and reasonable for the service provided. You remember positively those who communicated quickly and fully when something changed due to what you both did not take into account or that could not be foreseen at the outset that changed the timing, the amount, and the end result. You remember those especially when they made every effort to remedy the new situation as fast as humanly possible. You probably have enthusiastically referred those providers to others without even being asked to by them. You remember and appreciate those who have provided their services to you in a reasonably prompt and thorough manner. I am sure you have had a good number of these positive experiences. On the other hand, I’m sure you have had a good number also of dealings with many providers in these areas where it was entirely the opposite of the first examples I just outlined. This, more than anything, is your best and most frequent reminder of the principle …Diligence. You want always to be like those providers that allowed you the courtesy of a positive experience when having a service performed for you.

Diligence

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You also are reminded constantly and remember those well where they missed every area of diligence when going about providing their service to you. They are your constant reminder of just how you do not want to conduct your professional service business and how you do not want to be regarded by those who have used your services. And even more, you do not want others who are not currently your clients to be referred to someone else because of the reverse “un-referrals” that those who had contact with you referred away from you. No one in any of these negative experiences has won anything. This is largely how they have organized themselves and others around them to be able to make those positive experiences happen for a high percentage for their clients. Those positive experiences we have all had were able to happen by those providers by a number of things that they were doing behind the scenes to make that positive experience occur time after time. It was not luck. It was not chance. It was not done by ‘winging’ it. Rather, it required their diligence behind the scenes in order for them to deliver an exceptional service to you in person. It required them to pay attention to and be diligent in their planning for the service that you needed and that you agreed on. It took time, skill, and experience in supervising all the aspects that needed to come together behind the scenes by themselves and by those in their employ. It required them to have a persistent approach from beginning to end and to stay with it for your benefit and their earning your trust, your repeat business with them, and enthusiasm to refer them to others. I know you are seeing yourself in this story. You do the same things behind the scenes so that the level of service you perform for your clients face to face is the positive experience that you want to deliver and that your clients expect. When you haven’t done these things, I’m sure that you were the first to know it and then your clients were quick to remind you, both knowingly to you and probably without telling you. And, the latter is something that can prevent you from performing positively and growing in your career proportionately…something none of us want nor something you can afford. Diligence includes some aspects that might not be as obvious as the first part of our story. There are some subtleties in what diligence pertains to from your perspective as well as your client’s viewpoint. You may run into a situation where a potential client has a situation that they feel warrants our services based on their perception of what it is that we do. In an initial relationship building and preliminary fact-finding session, you find that the relationship is really not warranted. You find that the solution to their current needs and budget is not the best use of your service levels and not to their advantage financially from a cost benefit perspective. In this case, your diligence on behalf of this client should have you direct them to someone who is in business for that and who more often handles the kind of service this person needs currently.

Diligence

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On the opposite end of this spectrum, you may have a situation where you do not have the ability to give them the level of competence and service that their needs dictate. Diligence here requires you to evaluate the situation and involve others who can meet the level of needs for this client. Diligence requires you also to develop, analyze, present, and implement only those recommendations that make sense to and for your clients. The suitability issue is one of the most important factors that you need to pay utmost attention to for the benefit of those for whom you provide services. The future, as it unfolds, has a way of looking backward to see where any negative consequences were initiated. It can be a few months or decades into the future where any known unsuitability issues can rear their ugly head. There is no “statute of limitations” period for responsibility for misguided or intentional implementations that can be found to have been unsuitable at the time of the original planning recommendations. Diligence applies to making sure you have made reasonable investigation and analysis of alternatives available in the marketplace when it comes to the recommendations you make on financial products to meet the requirements prescribed from the planning process. If you have not personally made the complete evaluation process in this area yourself, it can be satisfied by using other professionals that have done so to the level of comprehensiveness required and expected by your standards and requirements to meet your reliability threshold and your client best interests. Your employers should know about your personal code of ethics and your commitment and obligation to adhere to them in practice and in spirit. That would be important so that all are on the same page in that you are expecting them to mirror the level of ethical conduct that you are holding yourself accountable to. One more group of people is key in supporting the logistics of your practice and service support to your clients, but are many times not involved formally or fully in the awareness of your ethic standards commitment and in the specific nature of each component. They are your personal assistants and other support employees that you directly compensate or are provided to you in some cases if you work in a firm. It is invaluable for you to make sure you are paying attention to them in providing guidance, guidelines, and grounding in your ethical preference in all your activities as well as theirs. Having an ethics session at least once a year will go a long way in their backing you up in their support by making sure all things done for you have had an additional ethics filter through their process along with yours. Most people have increased loyalty and appreciation for their employer and for the place they work when they know by actions in addition to words that ethics are important. They can also be more assured that they will be dealt with ethically when you and/or the firm is grounded in ethical client-

Diligence

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centered fundamentals. It’s the culture most quality people want to be in for the long haul.

Noteworthy…

Diligence - I will act “diligently” in providing professional services.

Diligence Checkpoint Review

• Define ‘Diligence’ in your own words

• What aspects of ‘Diligence’ have you already incorporated into your practice?


Notes________________________________________________________________________________________________________________________________________________________________________________________________________________

Borrowing & Loaning

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“Borrowing & Loaning” Let’s take a look at a couple of specific areas of ethical conduct that have had an increase of occurrence. They deal with the subjects of loans between agents and their clients. An agent lending money to a client is presumed to not be in the best interest of the client and should be avoided. The agent should find an alternative solution for their client. The key here is the “appearance of impropriety” that is evidenced in these situations as being an ethical issue regardless how well put together these exceptional loans might be. Loans to clients are also viewed as bad due to the potential that they would actually be, or perceived, as enticements to do other business with the agent; or in some cases with low interest rates, it could be viewed as a form of rebate. You are urged to avoid the practice of borrowing from or lending to clients. Suffice it to say that the best route is to not have any loans between yourself and your clients and/or family member clients. Let’s help them out by finding sources of those funds outside yourself.

Borrowing & Loaning

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Noteworthy…

Borrowing - I will avoid the practice of borrowing from or lending to clients.

Special Situations – Checkpoint Review

• Define ‘Borrowing / Loans’ as learned here in your own words.

• What aspects of ‘Borrowing / Loans’ have you already incorporated into your practice?

• What will you do differently, if anything, as a result of this re-examination of these

areas? Notes___________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

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Section 2 - Regulatory Ethical Conduct

The fiduciary responsibilities bestowed on the insurance agent are embodied in the degree of trust that the insurance company places in the agent. The future of any insurance company depends on the actions of their agents. The agent is often the only personal contact the consumer has with the insurance company and is the one best positioned to gather accurate information to aid in making quality underwriting decisions. In addition to this fiduciary position and the specific responsibilities that a professional has to their clients, there are additional fundamental principles of professional conduct that highly regarded representatives embrace and adhere to in the everyday course of their daily business lives. We have discussed these previously in your course text.

Understanding the regulations Each agent is expected to have an in-depth understanding of the laws governing their actions and further it is expected to conduct insurance practices within the allowable corridors the laws provide. Many insurance companies require their agents to complete company specific training dealing with the fiduciary relationship between agent consumer and insurance company.

Control of Agents The future of any insurance company depends on the actions of their agents. The agent is often the only personal contact the consumer has with the insurance company and is the one best positioned to gather accurate information to aide in making quality underwriting decisions. The insurance industry is a competitive field and this competition has the potential to become the overriding factor of the sales process. There are many deceptive actions that unscrupulous agents may use to sway a consumers decision in their favor. When competition between companies or agents becomes too frenzied the consumer is subject to a greater risk that they will be presented with information that, while not false, is not wholly true or does not present the whole picture. Most states have adopted model legislation set forth by The National Association of Insurance Commissioners (NAIC) This legislation outlines prohibited practices and some required notifications and disclosures.

The McCarran-Ferguson Act Congress passed the McCarran-Ferguson Act (sometimes referred to as public law 15) to (among other things) set general guidelines for states to follow in developing their own regulations. The following is a brief summary of unfair trade practices as described in this law.

Regulatory Ethical Conduct

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Misrepresentations No person shall make, issue, circulate, cause or knowingly allow to be made, issued or circulated, any estimate, illustration, circular, statement, sales presentation, omission, or comparison that:

• Misrepresents the benefits, advantages, conditions, or terms of any insurance policy;

• Misrepresents the dividends or share of the surplus to be received on any insurance policy;

• Makes any false statement as to the dividend or share of surplus previously paid on any insurance policy;

• Misrepresents or is misleading as to the financial condition of any persons or the legal reserve system upon which any life insurer operates;

• Uses any name or title of any insurance policy or class of insurance policies that misrepresents the true nature of the policy or policies;

• Misrepresents for the purposes of inducing or tending to induce the lapse, forfeiture, exchange, conversion, or surrender of any insurance policy;

• Misrepresents for the purpose of effecting a pledge, assignment, or loan on any insurance policy; or

• Misrepresents any insurance policy as being a share of stock.

Discrimination It's a violation of the law for any person to unfairly discriminate between individuals of the same class and equal expectation of life--with respect to life insurance or annuity--in the rates charged or dividends or other benefits payable, or in any other terms or conditions of the contract. Insurers also cannot refuse to insure, refuse to continue to insure, or limit the amount of kind of insurance solely because an individual has certain physical or mental disabilities. The insurer is not prohibited from discrimination when the refusal or limitation is based on sound actuarial principles. Unfair discrimination may not be made between individuals or risks of the same class and essentially the same hazard in the amount of coverage solely because of the geographic location of the individual risk except in the following instances: The refusal, cancellation or limitation is for a business purpose that is not a mere pretext for unfair discrimination or one that is required by law or regulatory mandate.


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Rebating Except where the law specifically provides, it is illegal to make a contract or insurance or annuity that offers a rebate as an inducement to make a purchase. Rebating includes any of the following activities:

• Making agreements not plainly expressed in the policy • Paying or giving "kick-backs" or other considerations in lieu of the required

premium payment • Giving special favor or advantage not specified in the contract • Promising returns, profits, stocks bonds or other securities.

This is much like price-cutting on the purchase of cars and other products but, when related to the purchase of insurance, it is a prohibited activity prohibited because: (1) it is considered to be unfair competition among agents, (2) some knowledgeable consumers would buy a new policy each year where first year commissions are larger than renewal commissions, (3) higher lapse rates increase long-run cost, and (4) more sophisticated consumers could negotiate larger rebates than the less informed and this would be unfair. Some insurers adjust to rebating laws by offering their agents and brokers two or more series of contracts with the same contract provisions but with rates which reflect different levels of commissions. For example, the thoroughly factious Acme Insurance Company may offer a "Personal Series" which may include a normal level of commissions. The same company's "Executive Series" may pay the agent or broker a lower commission and offer a lower rate to the consumer but, in competitive situations, the agent is likely to propose the "Executive Series" in order to gain a price advantage. Nothing in the sections on Discrimination or Illegal Rebates is meant to include the following as acts of discrimination or rebating:

• In the case of any life or annuity contract, paying bonuses to policy holders or abating premiums because of the surplus accumulated from non-participating policies. Such bonuses must be fair and equitable to policyholders and in their best interest.

• In the case of life or accident and sickness insurance policies issued on the

industrial debit plan, making an allowance for the policyholder who, for a specified period, have continuously made payments directly to the insurer which have resulted in a savings because the agent did not have to make the collection personally.

• Readjustments to the rate of premium for group insurance policy based on the

loss or expense experience under the policy at the end of the first or subsequent policy year.


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• In the case of insurers allowing their employees to receive a reduction on the premiums paid by them on policies on their own lives or property.

• Issuing life or accident and sickness policies or annuity contracts on a salary

savings or payroll deduction plan at a reduced rate consistent with the savings made by the use of such a plan.

Commingling In regard to the handling of client funds, the agent is strictly bound not to convert the client’s funds to their own use. Further, the agent should not commingle the client's funds with those of their own (even temporarily). Some debit agents will occasionally accept cash payments for premiums, but a properly executed receipt must be left with the policyholder and these funds must be immediately remitted to the insurance company. The agent cannot, under any circumstances, deposit the cash in their checking account and write a check to the insurance company (this is one of the most common areas of complaints relating to commingling of funds). The best way to avoid problems relating to commingling of funds is to make it a policy to never accept cash in payment of insurance premiums or application fees. To summarize, any agent who takes funds held in trust for his or her own use is guilty of theft and will be punished as provided by law.

Misappropriation Another issue of ethical behavior with regard to a customer's funds is covered by the term "misappropriation"; this refers to situations in which the agent keeps funds (primarily premiums) belonging to the company, the customer or a beneficiary. For example, supposed an insured of Acme Insurance Company was killed in an accident; his $1,000 life insurance policy had a double indemnity rider and in some miss-guided attempt to impress the beneficiary with the value of this rider, the insurer mailed two checks in the $1,000 each to the agent for delivery. The unscrupulous agent gave one check to the bereaved widow and then induced her to endorse the second check to the agent on the grounds that its issuance was in error and that it had to be cashed and the money returned to Acme. When the malfeasance was discovered, Acme re-issued a $1,000 check to the beneficiary and revoked the agent's license.


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Noteworthy…

Misrepresenting, Discrimination, Rebating, Commingling, and Misappropriation. I will

observe all regulatory issues in providing professional services.

“Regulatory” Checkpoint Review

• Describe the McCarran-Ferguson Act in your own words.

• What aspects dealing with ‘misrepresentation’, ’rebating’, ‘discrimination’, ‘misappropriation’, ‘commingling’ have you already incorporated into your practice?


area? Notes____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


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Commission sharing Another area of insurance ethics that the agents must be aware of is the payment and acceptance of commissions. No person may receive commissions on an insurance sale unless they have been duly licensed by the state to sell the class of insurance sold. In addition to the state insurance license, the agent must also have a certificate of authority to sell the products of any insurance carrier whose policies they sell. Generally, the only form of commissions that may be paid to an unlicensed individual are renewal commissions on business that was written by the person in the past. This is most common when an agent retires from a career in the insurance industry and continues to receive compensation for years into the future for products sold or services rendered when they were duly appointed and licensed. No duly licensed and appointed agent may share any commissions earned on the sale of any insurance product with an unlicensed person. The most common instance of sharing commissions with unlicensed individuals is when a new agent will be paid a commission for sales that were made with a supervisor during training. Commissions may be paid in the above example, but only if the new agent is duly licensed and appointed on the date the sale is made. The common misconception by many is that the agent can receive a commission if the payment of such commission is deferred until the agent is licensed and appointed.

Record keeping Record keeping is an essential activity in the insurance business and many aspects of record keeping are regulated. It is a subject worthy of mentioning in any consideration of ethical activities but since a wide variety of laws and regulations apply, you are encouraged to consult the specific laws and regulations of your individual state.

Replacement Another topic for discussion in the area of insurance ethics is that of policy replacement considerations. In the past decade, the advent of new generic policy types and the emergence of several marketing organizations which focus on replacement of cash value policies with term insurance have brought much publicity to this area of ethics. First and foremost, the insurance industry must demonstrate concern for the consumer. Any policy replacement situation should first address the best interest of the client. For the purposes of this course we will deal mainly with the replacement of life insurance, but a similar discussion could pertain to all forms and classes of insurance. First we will start with what replacement is not. Replacement is not:

• Exercising a contractual conversion privilege with the same insurer.


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• When a group plan where all or part of the cost is paid by the employer is changed for another policy (even the policy of another insurer).

• Where the existing insurance is industrial insurance. • When the existing insurance was issued in connection with a company

sponsored pension plan. In all of the above examples, full disclosure of all relevant facts to the client is required even though they are not considered replacements. Generally replacement includes the following transactions. Any transaction in which new life insurance or annuity products are purchased and the agent knows that as part of the overall transaction the existing life insurance, health insurance or annuity contract has been or will be:

• Lapsed • Surrendered • Converted to paid-up insurance, continued as extended term or converted to any

other non-forfeiture benefit. • Converted in any manner to reduce the face amount or benefits of the existing

insurance or length of benefit. • Reissued with a reduced face amount, thereby releasing substantial cash values

(substantial cash values are deemed to be a release of 50% or more of the accumulated cash values).

• Assigned as collateral for a loan to purchase a new policy. • Subjected to substantial borrowing of the loan values whether it be a single loan

or multiple loans (substantial borrowing is borrowing 50% of more of the accumulated cash values).

• Canceled upon the issuance of a similar class of insurance whether from the same insurer or a different insurer.

Replacement laws require timely notification of replacement to the insurer of the policy being replaced (in the case of replacement originating from a different insurer). Notification to the policyholder of the existing policy is also required. The above notification is designed to give all interested parties adequate notice of what is transpiring and gives the consumer notice of several factors to consider. When replacement is being considered there are many factors that could influence the decision.


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Following is a list of many of those factors:

• Policyholder's pre-existing conditions. • Policyholder's need for protection. • Current policy's age and accumulated non-forfeiture benefits (if any). • Current policy's face amount • Financial rating of both current insurance company and proposed company. • Current policy premium and client age. • Proposed policy premium and client age. • Future premiums both proposed and existing policies. • Policyholder's need for retirement planning • Conversion options available in both the existing and proposed policies. • Non-cancelable feature of both existing and proposed policies. • Renewal rates for both existing and proposed policies. • Other miscellaneous riders such as: • Option to purchase additional amounts • Waiver of premium • Family income rider • Disability income rider • Inflation rider • Settlement options available • Paid up options • Dividend options

While the above list does not necessarily include all relevant decision making factors in the consideration of replacement, it does cover most of the bases. When replacement is considered it should be noted that generally the replacing agent must be able to demonstrate that the replacement was warranted and in the best interest of the client. The replacement of insurance through incomplete, misleading or inaccurate sales practices is called twisting and is illegal. Twisting is inducing a customer to cancel one contract and buy another one for the purpose of getting a commission, by misrepresenting the facts. An unfair or misleading comparison of two contracts can be a disservice if it causes a customer to drop a policy they've had for some time in order to buy another one that is no better, or perhaps, not as good. There are, however, cases in which changing policies is in the best interest of the policyholder and such justifiable replacements are legal. Most states require that the proposed insured list all existing coverage on the application for insurance. In addition to listing the coverage they also must indicate whether or not the existing coverage will be replaced with the proposed policy. The client has a legal right to change their mind and let their existing coverage lapse after they receive the new policy; however, if this action is an identifiable trend among the clients of any insurance agent most states will use this as prima facie evidence of the agent's intent to circumvent the replacement regulations.


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Conflicts of interest The insurance agent must always keep the client's interest first and foremost in their mind as they make recommendations and assist the client in implementing their insurance plan. The mere fact that the agent will earn a commission if the client follows their advice to purchase a policy would seem to create a conflict of interest. It is this dichotomy of potential interest in the insurance market that compels the insurance agent to be able to justify all recommendations made to a client. The client's needs should always dictate which criteria are used in the evaluation of any insurance product considered during the formulation of their insurance plan. If the agent has any potential conflict of interest they should advise the client as to the nature of the conflict. To be cautious it is best to advice the client even if you are sure that this conflict will not affect your judgment on the issue at hand. Listed below are several potential conflicts of interest in the insurance industry:

• The sale of insurance to someone with no real insurable interest • The sale of inappropriate type of coverage • The sale of excessive coverage • Replacing insurance to the detriment of the client • Adjusting a claim for a policyholder who is also a relative • Knowingly falsifying or omitting adverse information on a policy application

A quick glance at the list above should illustrate just how filled with potential conflicts of interest. Only through ethical conduct will the agent build a lasting career in the insurance industry; luckily most individuals have a strong sense of ‘right and wrong’ that will help in any borderline decisions. To summarize the agent’s fiduciary responsibilities, it could be stated that the agent must exercise utmost good faith in all of their actions with the consumer and the insurance company or companies they represent. This good faith must be based on a thorough knowledge of the applicable state insurance laws and insurance company procedures, and a proactive approach to practicing their profession with principles as the cornerstones.


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Noteworthy

Commission Sharing, Record Keeping, Replacement, and Conflicts of Interest. I will

observe all regulatory issues in providing my clients with quality services.

“Regulatory” Checkpoint Review

• Describe the each of the above in your own words.

• What aspects dealing with ‘Commission Sharing’, ’Record Keeping’, ‘Replacement’ and ‘Conflicts of Interest’ have you already incorporated into your practice?


area? Notes____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________


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Other trade practices Additional Practices deemed to be unfair are briefly summarized below:

• False or misleading advertising • Defamation calculated to injure any person or insurance company • Coercion, Intimidation or Boycott which results in or intends to result in

unreasonable restraint or monopoly in the business of insurance While the above unfair trade practices may seem to cover all of the bases and be general enough in nature to be interpreted to cover many situations it does still leave the agent considerable room to "dance" around the rules. We will refer back to the fiduciary responsibility of the agent to use utmost good faith in their actions. It should be apparent that the question of insurance ethics encompasses several areas which all interact to assure that the consumer is served to the best ability of the insurance companies and agents. Unfair claims practices is an area where the consumer will often complain even if their treatment has been equitable. There is a natural tendency for the consumer to feel that their claim was settled unfairly. The consumers have several avenues open to them to pursue equitable claims settlement including arbitration. Below is a summary of what is considered unfair claims practices under the McCarran-Ferguson Act: No person shall commit or perform with such frequency, as to indicate a general business practice any of the following:

• Misrepresenting pertinent facts or insurance policy provisions relating to coverage at issue;

• Failing to acknowledge and act reasonably prompt upon communications with

respect to claims arising under insurance policies;

• Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under insurance policies;

• Refusing arbitrarily and unreasonably to pay claims;

• Failing to affirm or deny coverage of claims within a reasonable time after proof

of loss statements have been completed;

• Not attempting in good faith to make prompt, fair and equitable settlements of claims in which liability has become reasonably clear;

• Compelling insureds to institute litigation to recover amounts due under an

insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by such insureds;


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• Attempting to settle claims for less than the amount to which a reasonable

person would have believed they were entitled by reference to written or printed advertising material accompanying or made part of an application;

• Attempting to settle claims on the basis of an application that was altered without

notice to or acknowledge or consent of an application;

• Making claims payments to insured or beneficiaries not accompanied by a statement setting forth the coverage under which payments are being made;

• Making known to insureds or claimants a policy of appealing from arbitration

awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration;

• Delaying the investigation or payment of claims by requiring an insured, a

claimant, or the physician of either to submit a preliminary claim report and then requiring the subsequent submission of formal proof of loss forms, when both contain substantially the same information;

• Failing to promptly settle claims where liability has become reasonably clear,

under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage; or

• Failing to promptly provide a reasonable explanation of the basis in the insurance

policy in relation to the facts or applicable law for denial of a claim or for the offer of a compromise settlement.

The above unfair claim practices are identified as illegal and not in the best interest of the consumer or the insurance industry as a whole. Since the consumer relies on the insurance company and agent to perform the services and provide the coverage outlined in the policy and sales literature, it is imperative that the agent be judicious in describing coverages and the insurance company be fair and equitable in evaluating and settling claims.

Ethics with others The insurance industry, unlike the legal and medical profession, lacks a unified and uniform code of ethics. There are several self-policing professional organizations that have very detailed ethical standards; however, membership in these organizations is voluntary and the majority of practicing agents do not belong to these organizations As an aspiring ethical financial professional, you might want to come together periodically to review and discuss the landscape of highly ethical behavior for yourself and others desiring to be highly ethical and long lasting within the insurance industry.


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Each member of your group would identify themselves as quality people who aspire to become a highly responsible and ethically grounded financial planner like you. The members would be a compliance-oriented group of professionals who embrace full voluntary adherence and compliance to the a code of ethics individually and collectively created by your group. They see the value and necessity of continually gaining knowledge regarding ethics especially in the areas of the principles and the rules that apply in practice to the principles. They support the fact that adherence to ethical standards influences other professionals and shapes public opinion toward them and the industry they represent. They agree that disciplinary review of those not abiding by the rules is important to be communicated and then backed up rigorously. They plan to gain an understanding of ethical theory as well as witness the actual application of the principles and rules underlying the principles that describe the standards as they are applied in specific situations in the field.

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Notes & Summing it up In summary, we would like to say that while all of the topics discussed in this course are relevant to the topic of insurance ethics, they become moot without solid commitment to adherence to ethical standards. The insurance industry has just emerged from intense change and competition in which the overall image of the industry was diminished in stature. Much of the responsibility for ethics in insurance rest with the leadership and it is here where the best models of conduct are developed. You might have though that ethics were something that many read about in compulsory handbooks and training programs, but were left on their own to figure out what and how those actually were to be interpreted and applied in everyday situations. You might have heard about and seen dishonesty and unethical behavior in the financial professional world and felt that it was the way things were and that it would continue with no beacon of light for all to move toward. Now all of that has changed for you. There is an old phrase to be recalled that went something like…a high tide raises all boats.

Noteworthy Review

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“Noteworthy” Review…

Words – I will know about, fully understand, and use words appropriately and

accurately in all my communication with others.

Principles and Rules are the foundation of the any code of ethics and professional

conduct.

Integrity - I will offer and provide professional services with integrity.

Objectivity – I will be objective in providing professional services to my clients.

Competency – I will provide services to clients competently and maintain the

necessary knowledge and skill to continue to do so in those areas I provide

services.

Fairness – I shall perform professional services in a manner that is fair and

reasonable to clients, principals, partners and employers, and shall disclose

conflict(s) of interest in providing such services.

Confidentiality – I shall not disclose any confidential client information without the

specific consent of the client unless in response to proper legal process, to defend

against charges of wrongdoing by the CFP Board designee or in connection with a

civil dispute between the CFP Board designee and client.

Professionalism – My conduct in all matters shall reflect credit upon the

profession.

Diligence – I will act diligently in providing professional services.

Borrowing - I will avoid the practice of borrowing from or lending to clients.

Misrepresenting, Discrimination, Rebating, Commingling, and Misappropriation - I

will observe all regulatory issues in providing professional services.

Commission Sharing, Record Keeping, Replacement, and Conflicts of Interest - I

will observe all regulatory issues in providing my clients with quality services.

Noteworthy Review

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I realize how simple things can be and are for many, but at the same time how

difficult it is to have the overwhelming numbers of people within the financial

professional industry to also have this elevated sense of calling to ethical

standards and behavior.

I will pass on what I have learned today to others by word and by my example…

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