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1 September 2015 CFA Institute Journal Review

The Case for Investment Advising as a Virtue-Based Practice (Digest Summary)

  1. Karl Strauss, CFA

Investment advisers are the target of harsh criticism that suggests that ethics are irrelevant, or even a hindrance, to their work. The author’s review of the function of investment advisers shows that their success requires them to uphold numerous virtues, including justice, courage, and honesty.

What’s Inside?

The author reviews and counters the arguments in an upcoming publication by Alasdair MacIntyre, in which he claims that the activity of investment advising does not produce genuine internal goods and thus does not meet the criteria to be considered a practice. Additionally, MacIntyre argues that moral character disadvantages a financial adviser.

A different perspective on money and a thorough examination of the role of a financial adviser show that virtuous traits are necessary to succeed.

How Is This Research Useful to Practitioners?

One of the charges against investment advising laid out by MacIntyre is that investment advising does not qualify as a practice. A practice is defined here as a complex, socially established, cooperative activity that produces internal goods through the course of pursuing excellence in the activity.

Investment advising is clearly complex, as evidenced by the laws, regulations, and licensing applicable to the profession, as well as by the nature of many financial markets, instruments, and interconnected economic factors. It also is socially established, as the longstanding history of such institutions as the Financial Industry Regulatory Authority, the US SEC, market exchanges, and investment firms demonstrates. The many interdependent relationships show that investment advising is a cooperative activity; the client/adviser relationship is notable as well as the many colleagues each adviser works with. The pursuit of excellence is evident through the evolving standards of certifications, professional association requirements, and continuing education.

An internal good is defined as a genuine good; it justifies purposeful activity to achieve the good even when nothing further results. MacIntyre claims that money is an incidental byproduct of a true practice; money is a good only externally and instrumentally as a means of purchasing other goods. The author’s perspective is that money provides an intrinsically valuable freedom of choice, or positive liberty. Possessing money provides a means to obtain the basic necessities of life and the freedom to participate in the activities of one’s choosing. When an individual retires from working, he or she generally chooses to do so only with financial security as a prerequisite.

MacIntyre also argues that the investment advising industry fosters the development of vices. Institutional pressure exists to advance the interests of the firm and its clients above the overall community, and a focus on short-term accountability precludes investment advisers from maintaining long-term focus to achieve lasting prudence and integrity. Additionally, he claims that the disproportionate assignment of risks between adviser and client is an act of cowardice.

The author concedes that institutional circumstances put pressure on virtues, but advisers who act as proxies for their clients are acting in their clients’ best interests, managing risks in ways their clients would be otherwise unable or unwilling to do. Proxies in society advance the virtue of justice. An adviser’s excellence is developed over time through prudence and integrity. The virtue of courage is needed to overcome the many setbacks an adviser will face. An adviser focusing on the short term is failing to excel. Honesty and gratitude are fundamental for the development of the many interdependent relationships needed to succeed as an adviser. Honesty is essential to the trust required in a relationship, and accommodation flows freely in healthy, friendly relationships. Gratitude preserves relationships by acknowledging the other party and protects against resentment stemming from an unjustified sense of entitlement.

Abstractor’s Viewpoint

Investment advising is equated with enabling positive liberty, or freedom, to make money. Many clients use a financial adviser to preserve wealth; they are managing risk to protect this freedom, which illustrates the virtuousness of investment advising, especially in the context of an adviser acting as a proxy for retirees trying to maintain their quality of life.

MacIntyre, in his critique of investment advising, does not have firsthand experience with investment advising. The author concedes that some of MacIntyre’s charges apply to advisers who perform poorly, and the high turnover rate in the industry is indicative of those poor advisers being weeded out of the profession.

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