NISM Series X-A · Chapter 19: Ethical Issues

L1 · Foundation

Foundation — What ethics is, why business must be ethical, and the six grievance areas in advisory

The definition and Greek root of ethics, the gap between law and ethics, why the advisory business depends on trust and the Client First principle, and the six problem areas that generate investor grievances in the advisory business.

20 min read · Worth 5% of the paper · Written from pages 367–376 of the official NISM workbook · Updated 18 September 2026

19.1 What ethics is, and why it matters here

Investment Advisers HAVE TO GIVE ADVICE TO THEIR CLIENTS ON MATTERS THAT ARE RELATED TO THEIR FINANCES. THE GOALS OF THE CLIENT AND THE MANNER IN WHICH THEY WILL BE ACHIEVED ARE A VERY IMPORTANT PART OF THEIR LIVES.

That last clause matters. One adviser's misconduct damages every adviser. Ethics here is not only a personal virtue; it is an industry-level asset.

The definitions

And the second definition the workbook gives:

Learn those five. They appear directly as exam options: honesty, fairness, diligence, care and respect for others.

Law is the floor; ethics is the standard

There are several actions that people take in their day to day lives, including those related to money and financial activities.

This is the single most examinable idea in 19.1. Legal compliance and ethical conduct are not the same thing. A course of action may break no rule and still be wrong.

The workbook's own illustration: there might be an Investment Adviser who MIGHT NOT PROVIDE ANY AFTER-SALES SERVICE to her clients, even though this is essential and needs to be looked at carefully. THIS CLEARLY GOES AGAINST THE ETHICAL PRINCIPLES THAT ARE REQUIRED TO BE FOLLOWED. EXCUSES MIGHT BE GIVEN FOR AVOIDING SUCH WORK, OR IT COULD BE SHIFTED TO SOMEONE ELSE, BUT THIS IS A CLEAR VIOLATION OF ETHICAL PRINCIPLES.

Notice that no regulation is broken by being slow to return calls. It is still a violation — of ethics.

19.2 The importance of ethical conduct in business

There are various reasons for business to be in existence, WHICH INCLUDE THE PURPOSE OF MAKING PROFITS AND MONEY FOR ITS VARIOUS STAKEHOLDERS. At the same time there is a NEED TO GO BEYOND THIS PURPOSE AND LOOK AT THE BIGGER PICTURE, BECAUSE THIS IS WHAT DETERMINES THE VALUES OF A CERTAIN SOCIETY AND THE COUNTRY IN WHICH IT OPERATES.

Business has to be done ETHICALLY WITH THE RIGHT PRINCIPLES SO THAT THERE IS A MORAL SUPPORT BACKING ITS ACTIONS.

The Client First principle

This has to be SEEN IN ACTIONS OVER A PERIOD OF TIME, WHICH WILL ENABLE THE CLIENTS AND PEOPLE TO HAVE CONFIDENCE THAT THE INVESTMENT ADVISER CAN BE TRUSTED.

And then the sentence worth memorising word for word:

Fairness, and the absence of conflict

There has to be a FEELING AMONG CLIENTS AND PEOPLE AT LARGE THAT BUSINESS IS BEING DONE FAIRLY AND THAT THIS IS NOT AT THE EXPENSE OF OTHERS. THIS ALLOWS FOR THE COEXISTENCE OF THE BUSINESS WITH OTHER ACTIVITIES.

IF THERE IS A FEELING THAT THE INVESTMENT ADVISER IS LOOKING OUT ONLY FOR THEIR OWN SPECIFIC NEEDS AND INTEREST, THEN IT WOULD BE VERY DIFFICULT FOR THEM TO GAIN THE CONFIDENCE OF THE PEOPLE. THIS IS ONE OF THE MOST CRUCIAL FACTORS IN AN ADVISORY BUSINESS THAT HAS TO BE DEVELOPED OVER A PERIOD OF TIME.

Being proactive

Ethics here is not only about refraining from wrong. It includes an affirmative duty to raise what the client has not thought to ask about.

Business as role model

BUSINESS HAS A SPECIAL PLACE IN SOCIETY WHERE PEOPLE LOOK UP TO BUSINESS LEADERS FOR INSPIRATION, AND THIS HAS TO BE MAINTAINED. IT CAN ONLY HAPPEN WHEN THE BUSINESS IS DONE WITH ETHICAL PRINCIPLES.

The investment adviser CAN ATTAIN A HIGH LEVEL OF RESPECT AND CONFIDENCE OF PEOPLE IN SOCIETY AT LARGE ONLY WHEN THEY ARE CONDUCTING THEIR ACTIVITIES IN AN ETHICAL WAY. THIS WILL INVOLVE GIVING UP SHORT CUTS AND QUICK BENEFITS FOR STAYING TRUE TO THEIR PRINCIPLES.

Finally, IT IS VITAL THAT BUSINESS IS HELD UP FOR THE RIGHT KIND OF ROLE MODEL, AND INVESTMENT ADVISERS NEED TO STRIVE TO BE THAT ROLE MODEL. THIS WILL HAPPEN ONLY WHEN BUSINESS IS DONE IN AN ETHICAL WAY.

19.3 Ethical issues for an Investment Adviser

The intermediary's dual role

On the one hand the intermediary HELPS THE ISSUER IN MOBILIZING RESOURCES FOR DEVELOPMENT OR IMPLEMENTATION OF PROJECTS OR INVESTMENT IN THE CAPITAL MARKET, while on the other hand he HELPS THE INVESTOR OBTAIN A REASONABLE RETURN ON HIS INVESTMENT.

In the Indian financial market, THERE ARE MANY PRODUCTS WITH COMPLEXITIES WHICH THE COMMON MAN OR THE SMALL INVESTOR MAY NOT UNDERSTAND. IT IS THE FINANCIAL INTERMEDIARY WHO SHOULD TAKE THE MOST SUITABLE PRODUCT TO THE RETAIL INVESTOR THAT WOULD SERVE THE NEEDS OF THE INVESTOR BEST AND HELP IN FULFILLING HIS FINANCIAL GOALS.

The Zig Ziglar quotation

The financial intermediary SHOULD REALISE THAT HE WOULD BE VERY SUCCESSFUL IF HE FOCUSES ON HIS CLIENTS AND THE CLIENTS' NEEDS RATHER THAN ON HIS OWN NEEDS. The workbook quotes Zig Ziglar, the world renowned corporate motivator:

That quotation has been asked by name. Zig Ziglar, corporate motivator.

The problem with targets

THE INTERMEDIARY MANY TIMES WORKS ON TARGETS AND GOES ABOUT SELLING FINANCIAL PRODUCTS AGGRESSIVELY TO ACHIEVE THE TARGETS WITHIN A TIME FRAME. WHILE DOING THIS, SOMETIMES THE SUITABILITY OF THE PRODUCT TO THE INVESTOR IS LOST SIGHT OF.

The six main investor grievance areas

The workbook lists six, each with an illustration and, in most cases, a remedy. Learn all six with their examples — the examples themselves are examinable.

1. Lack of focus on understanding client specific situations or needs. Advisor's lack of focus on understanding CLIENT SPECIFIC SITUATIONS OR NEEDS so as to provide appropriate advice. SOMETIMES, CLIENT'S WISHES AND NEEDS MAY DIFFER. RISK PROFILING IS A MUST IN SUCH CASES.

Note the distinction the workbook draws — wishes versus needs. A client may want a small cap fund; what he needs may be something quite different. Risk profiling is what separates the two.

2. Lack of understanding of the product being sold. Advisors' LACK OF UNDERSTANDING OF THE FINANCIAL PRODUCT WHICH HE IS SELLING, ESPECIALLY THE RISKS INVOLVED AND SUITABILITY FOR THE CLIENT. This is addressed by EXPLAINING THE PRODUCT FEATURES, AND MAKING SURE THAT THE CLIENT HAS UNDERSTOOD IT, BEFORE MAKING AN INVESTMENT.

3. Lack of information about the overall market and other products. Advisors' LACK OF INFORMATION ABOUT OVERALL MARKET AND OTHER AVAILABLE FINANCIAL PRODUCTS, ENABLING HIM TO HAVE RELATIVE VALUATION AND UNDERSTANDING ON PROS AND CONS OF THE PRODUCT UNIVERSE. This too can be handled by EDUCATING THE CLIENT OR POINTING THE CLIENT TO RELEVANT SOURCES OF KNOWLEDGE.

4. Churning. ADOPTING WRONG PRACTICES LIKE FREQUENT SWITCHING FROM ONE PRODUCT TO ANOTHER TO INCREASE EARNINGS FROM COMMISSIONS, THAT IS, CHURNING.

That sentence ties the whole of Chapter 18's segregation rules back to an ethical root. The prohibition on an individual IA distributing exists because of churning.

5. Not educating the investor about risks. NOT EDUCATING OR INFORMING THE INVESTOR ABOUT RISKS AND UNCERTAINTIES ABOUT FINANCIAL PRODUCTS THAT ARE SOLD, WHILE HIGHLIGHTING ONLY THE GOOD FEATURES OF THE PRODUCT. THIS IS LARGELY ABOUT MISREPRESENTATION AND NOT SHOWING THE RISKS TO THE CLIENTS.

6. Poor after sales service. POOR AFTER SALES SERVICE OR DEVIATING FROM WHAT WAS PROMISED EARLIER.

A pattern worth noticing. Grievances 1, 2 and 3 are failures of knowledge — of the client, of the product, of the market. Grievances 4 and 5 are failures of honesty — churning and misrepresentation. Grievance 6 is a failure of diligence — not doing what was promised after the money was taken. Those three headings — knowledge, honesty, diligence — will help you reconstruct the list under exam pressure.

Think of it like this

The lawyer who broke no rule

An adviser stops returning his client's calls after the money is invested. Which regulation has he broken? Arguably none. Doing things that are within the ambit of the law is one thing, as this ensures that there is nothing illegal being done. But ETHICS GOES ONE STEP BEYOND THAT, as it brings into play what is right or wrong behaviour. The workbook names this exact example — poor after-sales service — and calls it a clear violation of ethical principles.

Years to build, moments to lose

A jeweller in a small town can be trusted for three generations and finished by one bad transaction. The workbook says the same of advisers: this trust is at the centre of all the activities of an investment adviser, because IT CAN TAKE YEARS TO BUILD TRUST BUT JUST A FEW MOMENTS TO LOSE IT ALL. And if it goes, regaining it could be next to impossible.

Ethos — custom, habit, character

The word ethics comes from the Greek "ethos", which means CUSTOM, HABIT OR CHARACTER. That origin explains the workbook's observation that ethics arises out of the basic values and character that a person has and is often the result of a lifetime of beliefs and values. It is a habit, not a decision taken fresh each morning.

The small cap fund and the retired schoolteacher

A 71-year-old asks for the small cap fund his neighbour is boasting about. The workbook's first grievance area covers exactly this: sometimes a client's WISHES and NEEDS may differ; RISK PROFILING IS A MUST in such cases, with its own example — small cap funds for senior citizens may not be appropriate. The adviser's job is not to obey the wish; it is to surface the need.

Arbitrage funds are not liquid funds

The second grievance area is the adviser who does not understand what he is selling. The workbook's illustration: arbitrage funds are sold as a liquid fund substitute, when the drawdown and volatility track record over short horizons of say ONE WEEK would show the picture. The remedy is simple — explain the product features and make sure the client has understood before making an investment.

Why an adviser cannot distribute

Churning — frequent switching from one product to another to increase earnings from commissions — is grievance area four. And the workbook draws the regulatory conclusion in the same breath: it is for this reason that SEBI HAS MANDATED THAT ADVISORS CAN'T DISTRIBUTE; BUT THE PROBLEM COULD BE PREVALENT IN OTHER CHANNELS. The segregation rules of Chapter 18 have an ethical root.

The client who did not know what to ask

Good ethics is not only refusing to do wrong. It should not be that the client has to keep asking for things which they would find useful; but if the investment adviser PROACTIVELY SUGGESTS things that the client needs to do, then this becomes a big positive factor. A client who never asks about a nomination, or a term cover, is relying on you to raise it.

Zig Ziglar's bargain

"You can have everything in life you want, if you will just help other people get what they want." The workbook quotes the corporate motivator Zig Ziglar to make a commercial point, not a sentimental one: the financial intermediary would be very successful IF HE FOCUSES ON HIS CLIENTS AND THE CLIENTS' NEEDS RATHER THAN ON HIS OWN NEEDS. Ethics and long-run profit point the same way.

Key terms in this chapter

Access person: Under the SEC code of ethics, a person who must report securities holdings on becoming an access person and at least annually thereafter, report all personal securities transactions at least quarterly to the Chief Compliance Officer, and obtain pre-approval for investments in IPOs or limited offerings.
Best interest standard: The Australian test under Section 961B of the Corporations Act 2001, listing the steps an adviser must take, including identifying the client's circumstances, ensuring information is complete and correct, and taking any other step reasonably regarded as being in the client's best interests.
Churning: The wrong practice of frequent switching from one product to another to increase earnings from commissions. It is the reason SEBI has mandated that advisers cannot distribute.
Clash of personal and professional values: A category of ethical dilemma, illustrated by an adviser who personally believes only in term insurance but is employed to promote ULIPs or whole life policies that carry higher premiums and higher commissions.
Client First principle: Conducting business in a manner that puts the interest of the client above everything else, which the workbook identifies as the correct ethical path for an investment adviser.
Compliance audit: An audit required to be conducted by investment advisers on a yearly basis by a practising Chartered Accountant. An adviser should disclose to clients if there are any material audit observations.
Deeper analysis: The first approach to resolving a dilemma. On detailed analysis it often becomes clear that what seems to be a dilemma is actually a clear case with one correct course of action.
Ethical dilemma: A situation where a person has to take a decision between two alternatives, neither of which is superior. The choice sends a signal, and a series of such signals reinforces the client's perception of the adviser's ethical standards.
Ethics: Several moral principles that decide and influence a person's behaviour, dealing with what is good for society and individuals. Also defined as a set of moral principles or rules of conduct providing guidance for behaviour when it affects others.
Ethos: The Greek word from which "ethics" is derived, meaning custom, habit or character.
Fiduciary: One who must act in the best interest of clients. Investment Advisers are fiduciaries, and must rise above conflicts of interest to ensure the client is always put at the forefront of any step taken.
Financial intermediary role: Channelizing domestic savings into investment vehicles, helping the issuer mobilise resources for projects and helping the investor obtain a reasonable return, and taking the most suitable product to the retail investor.
Finfluencers: Persons who claim to be investment experts but are not authorised by SEBI. Their proliferation is the reason SEBI stresses dealing only with registered Investment Advisers, and warns investors not to go by the number of followers on social media.
Full disclosure obligation: The duty to disclose all facts with no omission of details, covering not only avoiding wrong information but ensuring correct information is disclosed. It is essential where there is a conflict of interest and also where there can be a perception of conflict.
Fundamental ethical principles: The widely acknowledged principles of honesty, fairness, diligence, care and respect for others.
Greatest good approach: Resolving a dilemma by taking the step that does the highest amount of good for all those involved.
Law versus ethics: Doing things within the ambit of the law ensures nothing illegal is done, but ethics goes one step beyond, bringing into play what is right or wrong behaviour, arising from a person's basic values and character.
Least damage approach: Resolving a dilemma by doing whatever causes the least amount of damage.
Proper execution obligation: The duty to properly execute the work assigned to the investment adviser, without any conflict of interest.
Pure ethical dilemma: A dilemma where both alternatives are against some ethical principle, so that no matter what choice is made there is going to be some violation of ethics.
Reasonable or objective basis: The requirement that the manner in which a recommendation is formed must not be based on factors that benefit the adviser.
Reframing the problem: Reconsidering the entire problem in a different way, which could give rise to solutions not thought of before and provide the breakthrough that solves the dilemma.
Suitable advice obligation: The duty to give advice that would be right in a specific situation for a specific person, requiring proper study of the conditions relevant to that client.
Trust: The centre of all the activities of an investment adviser. It can take years to build trust but just a few moments to lose it all, and regaining it can be next to impossible.
Uberrimae fidei: The Latin principle of utmost good faith governing the adviser-client relationship. There cannot be profit made at the cost of the client, and the adviser must not take unfair advantage of the client's trust.

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Original explanatory writing based on the official NISM workbook for Series X-A, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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