On a scale of 1 to 10 with 1 being absolutely unprofessional and 10 being absolutely professional, how would you rate yourself? Having done this exercise with thousands of people, I think you probably rated yourself a 7 or above. However, if you pause for a moment, can you identify any specific reasons why you chose the number you did? More importantly, the higher you rated yourself, the more likely you are to succumb to ethical transgressions, such as conflicts of interest.

In the financial services industry, professionalism is an important building block to establish trust with your clients while also serving as an essential component of your fiduciary responsibilities. Yet, despite understanding the need for professionalism, certain aspects of decision-making operate on an unconscious level leading to decision-making biases that can inadvertently lead you to flawed and unethical decisions.

Dr. Sunita Sah, director of Cornell University’s Academic Leadership Institute and a professor of management and organizations at the Johnson Graduate School of Management, used a questionnaire to measure the perceived professionalism of business managers. She then engaged the same participants and asked them to respond to certain business scenarios that contained conflicts of interest. The results were surprising: “Consistent with my predictions, the greater the managers’ sense of professionalism, the more likely they were to report that they would accept gifts from people with questionable or ambiguous agendas, and less likely to be influenced by the specific gifts in the scenarios.”

Overconfidence bias is described as your tendency to possess flawed assuredness in your judgments when objective evidence doesn’t support such a belief. Studies have repeatedly shown that professionals minimize the effects of conflicts of interest, claiming that they will not be influenced by generosity from interested parties. In Dr. Sah’s article “Conflicts of Interest and Covid” (Scientific American, December 3, 2020), she said, “In reality, abundant evidence from social science research shows that influence from conflicts of interest often occurs on a subconscious and unintentional level. Even when decision-makers try to be objective, their judgments are influenced by financial incentives. And studies show that advisors routinely deny being influenced by financial inducements despite data demonstrating the opposite.”

In his book “Thinking, Fast and Slow,” author Daniel Kahneman referred to two types of thinking, which he labeled as System 1 and System 2. In System 1 your brain reacts to the stimuli and makes decisions immediately using previous experiences, belief systems, culture and desires. System 2, on the other hand, is the more rational part of your brain. In System 2 you think before you act. You may be surprised to know that almost 95 percent of your daily decisions are made using System 1. When faced with ethical conundrums, System 1 has a way of influencing your decision-making processes, causing you to take actions that you normally would avoid with more conscious deliberation.

Such automatic thinking allows inconsequential factors, such as the following, to play a role in your decision-making process:

• Do I like my client?
• Does the client remind me of someone I know?
• What are my perceptions of my peer group?
• Did I sleep well the previous night?
• What kinds of pressures and stressors do I have in my life at this moment?
• Did I recently have an argument with a loved one?
• Am I having a good day or a bad day?
• What are the current incentive programs or stated goals of my employer?

While you don’t anticipate these factors would have an impact on your decision-making, System 1 thinking interrupts your rationality. Fiduciary requirements, which are part of your position, suddenly become compromised as System 1 distorts the facts and circumstances from which you assess what is the proper choice. It often does this with the assistance of confirmation bias — your tendency to interpret information in such a way that it supports your established beliefs. Therefore, stress, meeting goals and other inconsequential factors interfere with your fiduciary responsibilities when presenting options, policies and programs to your clients.

On July 7, 2023, FINRA expelled Monmouth Capital Management for multiple fiduciary and regulatory violations. Among the practices alleged against Monmouth Capital Management were churning and providing false and misleading disclosures to their retail customers. Like many people who deviate from their ethical baselines, these employees probably didn’t initially intend to mislead their customers. Confirmation bias, with the assistance of System 1, plays an important role in convincing you that the self-serving decision is not only the correct choice but also in the best interest of the client.

Although you can never completely remove bias from your conscious and unconscious deliberative processes, you can develop methods to mitigate the effects. Framing is a powerful tool utilized by System 1 that tilts the scales to one side or the other. If you consciously pause before making your decision and think about the consequences of your actions, you engage System 2, which leads to increased conscious deliberation. Putting yourself in the shoes of your client and looking at the potential ramifications creates an empathy that can potentially get you to reconsider your initial inclinations.

Additional perspectives can also be obtained from supervisors and peers. This would be an additional protection to fight against your natural tendency to pursue self-interests. Such reviews mitigate the natural rationalizations that are likely to occur in System 1.

Having someone intentionally play the role of devil’s advocate is another way to reveal unconscious biases. When you have someone who lacks the same interests, you can generate different ideas and solutions to your client’s desires and problems. After decision-making flaws and potential biases are identified, then you and your colleague can discuss the best and most ethical ways to move forward.

As much as we hate to admit it, each of us is very capable of making bad decisions. While you give your best efforts, there are certain psychological processes that occur to which you have no control. If you understand what these processes are, how they work and how they manifest themselves, you have a much better chance of making ethical decisions and providing the services that your clients deserve.