• The London Finance Journal

Are Ethics Important in The Investment Industry?

Updated: Jun 7, 2020

After enrolling in a world-class Business School and beginning to pursue the earliest steps to reach a desired position in an Investment Bank, it is hard not to encounter the terms “ethics” or “professional standards”. Ethics encompasses a set of moral principles and rules of conduct governing an individual or a group, moreover, ethical behaviour is paramount in creating trust between market participants. On the other hand, professional organisations establish codes of ethics and professional standards based on fundamental ethical principles to protect the financial market integrity and to assure a healthy and well-functioning investment industry.

Trust Among Investors

For now, is it important to understand what these words means in practice, and why trust is the cornerstone value among investors. Trust in the investment profession is achieved only if those practicing within the industry adhere to the highest levels of ethical conduct and behavior. Furthermore, businesses and financial markets thrive on trust. In this respect, investment professionals provide access to information and to investment opportunities for clients and help them through the decision-making process. The reason why investment professionals have to be trustworthy is because their decision and action in the industry may directly or indirectly affect clients, prospective clients, employers and also co-workers. For instance, when investors encounter any news relating to inside trading, trading while in possession of information that is not publicly available and that is likely to affect the price, front running, when a broker enters into a trade because he has foreknowledge of a big non-publicized transaction that will influence the price of an asset, resulting in a likely financial gain for the broker or a conflict of interests, it brings into question the integrity and fairness of financial markets and lowers public trust and investor confidence. This result in a lower liquidity, profitability, and efficiency of the markets and economies.

Every practitioner in the investment industry should fully comply to their obligations to clients, prospective clients and employers and they have to be able to identify and manage any conflict of interest that could arise when either the employee’s personal interests or the employer’s interests conflict with the interests of the client. Firstly, let’s discuss the obligation to clients. Fulfilling this responsibility means the use of required professional knowledge and skills, managing risks that can affect the client interests, safeguarding the information, and treating clients consistently, fairly, and respectfully. Also, individuals working in the investment industry have the obligation to place client interests ahead of their personal or employer’s interest. Secondly, obligations to employers include providing services as agreed on in an employment contract, following or executing supervisory directives as required and maintaining professional conduct. Furthermore, loyalty, professional competence and care are among the most desired attributes of an employee.

Benefits and Consequences

Now that we have a briefing about the investment professionalism we will focus on the code of ethics. The topic of ethics can vary from individual to individual based on culture, social, personal and professional circumstances. In the investment industry the fundamental set of ethical principles should govern and guide the professional conduct of those participating world-wide. The participants in the global capital market have to act with integrity, competence, diligence, respect, and in an ethical manner with the public in the investment profession.

A result of these actions is seen as an increase in liquidity, profitability and efficiency of the financial system. Liquidity is generated from the large number of market participants, which help matching lenders to borrows, and in the process, it achieved their investment goals and influence the developing of the overall economy.

However, a breach in the ethical standards of a participant in the investment industry could generate serious consequences for the individual but also, and more important, on the industry as a whole. Nevertheless, a professional standard misconduct contributes to a negative effect for the clients, employer and can affect the integrity of financial markets. Bearing in mind the fact that if investors lose trust in the industry, it will be unlikely for them to lend capital in uncertain times. Furthermore, if this is the case, companies will be serious affected because there will be a shortage in capital through financing activities. Following this pattern, an unethical behavior within a company can be responsible for a chain reaction which can include several other business failures.


Compliance with ethical standards increases trust and fairness in financial markets which leads to a higher number of participants, increased liquidity, efficiency and availability of capital at a reduced cost. Ethical reasoning is a necessary ability for a participant of the industry, because the global financial markets has expanded both in size and complexity over the past decades and can generate ethical dilemmas which have consequences for individuals and the whole industry. In this respect, professional standards developed a framework for ethical decision making, aiming to diminish every potential conflict of interest that could arise between practitioners and, as a result, the overall economy can thrive.

By Mihai Golumbeanu