What Is Self-Dealing?
Self-dealing is any action taken by a financial professional that results in his or her personal gain at the expense of clients, employers, or colleagues. Acts of self-dealing include:
- Selling investments for less than what they’re worth (undermining what is best for their clients)
- Failing to recommend a product or service that is what’s best for a client
- Recommending certain investments over others to the benefit of the financial professional and/or his or her firm, not what is best for clients
- Transferring personal assets into your business as a way to avoid paying taxes on them
An act of self-dealing is what is considered unethical by the National Association of Personal Financial Advisors (NAPFA), The Institute for Certified Financial Planners (ICFP), and the Financial Planning Association. However, what constitutes an act of self-dealing also varies depending on what state you are in.
What Are The Consequences Of Self Dealing?
An act of self-dealing can have legal implications for a financial professional. For example, self-dealing can be found to be in violation of the law in what is known as professional liability cases. Typically what happens in a professional liability case is that the financial professional who has committed an act of self-dealing must pay back to the client what was taken from them unlawfully, usually with interest and penalties added on. Financial regulators such as the Financial Industry Regulatory Authority (FINRA) or state insurance departments can bring disciplinary actions against a financial professional for committing an act of self-dealing.
How Can You Avoid Engaging In This Type Of Behavior?
It is important for financial professionals to be transparent in what they do, disclose conflicts of interest, and avoid acting in what is best for themselves instead of what is best for their clients. If you are looking for more information on what the consequences could be if you are found to have engaged in an act of self-dealing or other illegal or unethical behavior, you can contact a financial professional with experience in legal ethics. Educated clients can be another way to avoid engaging in self-dealing. Educate yourself on what financial professionals are required to do by what states they’re in, what professional organizations exist (and what their codes of ethics entail), and what services you receive.
Helpful Resources On Avoiding Or Correcting Acts Of Self Dealing
Laws and Regulations FINRA Rules of Practice NAPFA’s Code of Ethics ICFP Standards of Professional Conduct The Financial Planning Association’s Standards of Conduct Professional Liability Insurance Providers
Examples Of What Might Constitute An Act Of Self Dealing?
The following examples might provide some insight into what might constitute an act of self-dealing. 1) A financial professional is involved with a business outside of what is their field, for example, a financial planner who also runs a glass repair company. The financial professional may use what he or she learns about what his clients need as a way to promote what products and services the glass repair company offers. 2) A broker takes on more clients than what they can properly service. The broker is aware what they cannot provide what each client needs in the way that is paid for, so the broker does not act in what is best for his or her clients when making investment recommendations to them. 3) A financial professional “sing the praises” of their own products and services while neglecting to mention what they are paid. 4) A financial professional tells what they think their clients want to hear in order to get what they want from the client, that could be money or another type of favor. 5) A financial adviser might recommend to his clients to invest in a mutual fund even though the expert isn’t sure what’s best for the customer, but that will make him more money.
The Bottom Line
An act of self-dealing can be illegal and/or unethical for a financial professional to commit, which could land that person in jail or cost that person their license. How does one avoid engaging in this type of behavior? Education on all aspects involved as well as transparency with clients about conflicts of interest. Resources available to help avoid self-dealing include laws and regulations, FINRA rules of practice, NAPFA’s code of ethics, ICFP standards of professional conduct, the Financial Planning Association’s standards of conduct, and professional liability insurance providers.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.