Chapter 4
Chapter Four:  Ethical Guidelines for Reviewing the Sales Process

Important Lesson Points

The important points addressed in this lesson are:

The ethics and values of the salesperson contribute more to the success of the sales process than any sales technique that might be employed by the practitioner
The objective of the approach step of the sales process is to create trust and rapport
The practitioner is ethically required to fully disclose that he or she is a seller of financial products in the opening interview
The principal ethical principle in the presentation step of the sales process is that any recommendation made to the prospect be suitable
Supporting materials used by the practitioner in the sales process must be sufficiently clear to be able to stand alone without misleading the reader


The sales process-generally consisting of the steps from pre-approach to the close-is the heart of any company's distribution system.  Basic to the success of the sales process is the salesperson's ability to develop trust and create rapport with a prospect.  As each of the steps of the process is considered and examined, it should become clear that the salesperson's ethics and values contribute more to the success of the process than any techniques that he or she might use or strategies that might be implemented.

Selling is not something that a salesperson does to someone else; instead, it is something that the professional does for and with a buyer that results in an exchange of value.

The Approach

Leadership is a common characteristic of successful sales professionals, regardless of their field.  Those leadership qualities of competence, credibility and vision are normally what make him or her successful.  The financial services practitioner, because of the more personal nature of his or her business, must possess these qualities in even larger amounts.  Whether the salesperson is an agent, stockbroker or other financial services practitioner, he or she must be viewed as both competent and credible before the prospective client will share financial information.  Because of that need to appear competent and credible, there is enormous pressure on the agent to be knowledgeable and experienced.  

For the great majority of financial services practitioners, this need causes them to obtain professional education and experience.  When that occurs, the practitioner and his or her client are benefited.  However, if the need to appear competent causes the practitioner to present him- or herself as having credentials, experience or skills that are not possessed, it becomes a serious problem.  

The purpose of the approach step of the sales process is to cause the prospective client to come to the understanding that the practitioner is someone with whom he or she may want to do business as a result of the rapport that has been created.  Although any practitioner may have a preferred setting, the approach may be accomplished in any number of environments.  It may be done at a seminar, during a telephone call or at a preliminary meeting.  The ethical requirement in the approach step is that the information imparted to the prospect be balanced and complete.  

Because this sales process step is designed to allow the practitioner to present him- or herself to the prospective client, the issues that are generally the most ethically sensitive have to do with how the practitioner represents him- or herself and what is discussed.  If the initial approach is made by telephone, as is normally the case, the practitioner should usually avoid discussion of specific products since adequate explanation in the relatively short space of time on the telephone is difficult.  An attempt to discuss a complex financial product in this setting often results in misunderstandings.  Unless the prospect is highly knowledgeable with respect to the product, a complete explanation is more likely to cause confusion rather than understanding.

However, it is not the practitioner's attempt to discuss a financial product over the telephone that is the principal ethical concern.  Potentially the most serious ethical issue in the approach step has to do with the practitioner's stating or implying that he or she has skills, experience or credentials that are not possessed.  

An example of that kind of misleading statement is the declaration that the practitioner is a financial planner or financial adviser when, in fact, the practitioner is a life insurance agent or registered representative.  Such a statement could suggest to the prospective client that the practitioner was in the business of providing unbiased analyses of client financial situations while having no inherent conflict of interest.  Of course, the practitioner's selling of financial products clearly creates such a conflict and makes that kind of statement misleading and a breach of ethics.  

If the practitioner was a registered investment adviser (RIA), use of those titles would be appropriate since the RIA that sells financial products is required to disclose to the prospective client in a client brochure that a conflict of interest exists in his or her offering financial products for sale.  Without that statement concerning the conflict of interest, however, appropriating these titles is misleading and presents ethical problems; furthermore, their use in that situation would be illegal in certain jurisdictions.  

The manner in which the practitioner holds him- or herself out to the prospective client could also impact the client's reasonable expectations and the practitioner's liability.  The reason for that heightened liability may be obvious; if the practitioner represents or implies that he or she has certain skills, the client may have every right to expect the practitioner to provide service at a level that one possessing those skills could be expected to provide.  Failure to provide that expected level of service could make the practitioner liable for damages the client sustains as a result.  Certainly any implication by the practitioner that he or she is affiliated with the government or any governmental agency in an attempt to suggest governmental approval of the practitioner or products is unethical.  

Some practitioners may choose to use a trade name.  While using a trade name is certainly acceptable, its use by the practitioner as a way of identifying him- or herself without also identifying the company being represented would be misleading.  To the extent that it misleads, it is unethical.  Consider, for example, the life insurance agent who identifies himself as a member of the "First Houston Group" in order to disguise his affiliation with a life insurance company.  There should be no question about the ethical value of that deception.  The agent is clearly attempting to mislead his prospective client, an obviously unethical act.

Discussion in the approach step of the products being offered presents another area that could create ethical concerns.  As in the other areas we've discussed, the ethical requirement is for full and fair disclosure.  Any product discussion should have as its objective a complete understanding by the listener.  Here are some practical examples of the meaning of full and fair disclosure:

If the practitioner states or implies that the products offered involve tax advantages, it should also be stated that only a thorough review of the client's situation would determine if those advantages apply to him.

The real nature of the product should not be obscured through the use of unfamiliar names.  Any product should be identified by its common name.  As an example, the use of the terms "plan" or "private pension" when referring to a life insurance policy could be unethical since those terms would tend to obscure the true life insurance nature of the product.

Using highly technical information about the products being offered that could be expected to mislead the person(s) receiving the information is unethical even if the information is true in every regard.

Even providing the prospect with a prospectus-without a discussion of the various costs of the product with the prospect-could be unethical if the practitioner believed the prospectus would not be read.  A failure to discuss costs would be less than full and fair disclosure.

Opening & Fact-Finding Interviews

The first substantive interview in the sale process is usually the opening interview.  The principal function of the opening interview is to continue to develop the rapport created in the approach step.  The opening interview leads directly into the fact-finding interview.  The ethical principles governing full disclosure require that the prospective client be fully apprised of the practitioner's status as an advocate for a financial product or products.  What that means is simply that if the salesperson is a stock broker, a property and casualty or life insurance agent, that identifying information needs to be shared.  

If the practitioner represents a particular company, the status as a representative of that company needs to be disclosed; in addition, if the salesperson is a registered representative he or she should identify the company and broker/dealer and provide home office addresses and telephone numbers.  

Unless the practitioner is an RIA the practitioner should not represent him- or herself as a financial planner, investment planner, consultant or adviser.  It is ethically responsible to describe what you do and the results you seek as long as you also state that the results are accomplished through the purchase of stocks, bonds, mutual funds, life insurance, annuities, or whatever other product you sell to achieve the desired results.

Often the prospect needs to be disturbed about his or her present situation before taking any steps to improve it.  In order to disturb the prospective client, the opening interview will sometimes include graphics; typically, these graphics will depict marginal income tax brackets through the years or some other relevant statistics.  When using these graphics, it's important to make sure that they do not mislead the prospect when presented without accompanying descriptive text and that the material match the prospective client's level of understanding.  In addition to graphics, testimonial letters from satisfied clients are often employed.  If you choose to use testimonials or endorsements, they must be genuine and reflect the endorser's current opinion, and any financial interest held by the endorser-for example, that it is a paid endorsement-must be disclosed.  

Although sometimes accomplished in a separate meeting, fact-finding often flows directly and easily from the opening interview and is an extension of it.  The object of the fact-finding interview is to gather sufficient information to support a recommendation that is suitable to the client's situation and consistent with his or her objectives and tolerance for risk.  That objective applies whether the interview is preliminary to an insurance product or an investment product recommendation.  

Usually, the fact-finding step of the sales process presents few specific ethical issues that have not already been considered. The practitioner has an ethical and legal duty to make a diligent effort to determine all of the client's circumstances that are relevant to his financial situation.  For the financial services practitioner seeking to make a suitable recommendation, these circumstances include the prospect's current finances as well as his or her hopes and dreams.  

Whenever interacting with the prospect, care must be taken to ensure that your questions don't inadvertently lead the prospect to believe that you are in the business of providing services not actually provided.  For example, a life insurance agent's questions regarding the prospect's investment portfolio could cause the prospect to conclude that the agent is in the business of providing investment advice apart from his business of selling financial products.  Unless the agent was an RIA, such a conclusion would be incorrect.  

Similarly, the tools that the practitioner uses could lead the prospect to erroneous conclusions.  For example, suppose the data-gathering form shown to the prospect is titled Financial Planning Form.  A similar conclusion-that the practitioner is in the business of providing financial advice for a fee-could be drawn by the prospect.  As a financial practitioner, you have the responsibility to avoid anything that could reasonably be expected to mislead the prospect.  Additionally, you have the ethical responsibility to correct any misperception of which you become aware.


A critical step in the sales process is the presentation.  The purpose of this step is to present to the prospect a solution to a need that he or she has admitted having.  It is the matching of an insurance or investment product to the prospect's requirements.  The principal ethical issues in this step involve the selection of the product to recommend and the practitioner's communication with the prospect about it.  

The overriding ethical issue with respect to product selection is that it must be suitable to the prospect's circumstances and meet the acknowledged need.  The NASD's "Rules of Fair Practice" require that any recommended securities transaction be suitable in light of the prospect's financial situation and needs.  This same suitability criterion should also be applied to the life insurance agent's recommendations.  Indeed, it should apply to all financial transactions involving the practitioner and prospect whether or not the recommendation involves a financial product considered a security or one that is not a security.  

In addition to product selection, a significant ethical issue in the presentation step concerns how the product being presented is communicated to the prospect.  Although it should be unnecessary to state this obvious ethical requirement, the product must be properly identified.  Regardless of the nature of the recommended product, it needs to be referred to in terms that offer understanding.  So, if the product being recommended is a stock or bond, you need to call it such; if it is a mutual fund or a life insurance policy, the prospect must be so informed.  Calling the product by a name that is unfamiliar to the prospect may result in its true nature being disguised.  To do so intentionally is unethical.

It is no secret that selling often involves educating the prospect.  Furthermore, educating is frequently done by explaining the unknown in terms of what the student already knows.  In the recommending of financial products, this method involves a high probability of misleading the prospect and should be avoided.  For that reason, it is important to eschew the use of analogies to explain how a particular product works.  The ethical concern with using analogies is that the analogy often leaves out more important information than it imparts.  As a result, the prospect may have an incomplete and erroneous understanding of the product.

An ethical concern similar to the one just cited occurs when product functions are explained in reference to other concepts.  To cite an example: a practitioner may want to describe policy dividends received by a policyholder as investment return.  This characterization would be highly inappropriate, even though the principal component in many companies' dividend declaration is its return on invested assets.  

There are two ethical concerns in such a description of participating policy dividends: in the first place it misleads the prospect by being superficial and, secondly, it erroneously positions the life insurance product as a security.  For the same reasons, the use of the term "investment" when referring to a life insurance premium would be unethical.

In addition, the comparison of alternative investment or savings vehicles, if done, needs to be approached carefully.  It should be clear that the simple comparison of historical returns on certificates of deposit and growth stocks would be misleading unless the many differences between the two products were also detailed.  In fact, any comparison of financial products that are dissimilar must also compare any differences between the products in the areas of:

tax features, and
any other important feature   

The need to provide this information is implicit in the objective of a product comparison.  The reason to provide a comparison between products is to make the prospect better informed and therefore better able to make a fully-informed decision.  A fair and balanced comparison that details the pros and cons of each product along with a detailed examination of their similarities and differences is the only ethical way to do that.

A practitioner may be interested in presenting the relative merits of competing products or sponsoring companies.  The ethical imperative in such a comparison is that it must be balanced and complete.  A "balanced" comparison is one that compares all of the important features of the products and examines the advantages and disadvantages of both products. It is obvious that the intentional misstatement of fact concerning a competing company or product would be unethical; it may be less obvious that the intentional omission of material information would also be unethical.  The guiding ethical principal is that a comparison must include a comparison of all of the important features.  Statistics are often necessary and helpful when comparing products or companies; they must be substantiated and referenced whenever they are used.

Prospects will vary substantially from one to the other in their risk-comfort levels.  That level of comfort with risk applies to the products they prefer to the strategies they will implement.  While many will avoid risky planning strategies, others will try to push the envelope as much as they can. When discussing the possible use of strategies or products that involve risk, the key ethical consideration for the practitioner is appropriate risk disclosure.  The competent practitioner will understand the risk being taken by the prospect that implements a proposed strategy; often, however, the prospect's awareness level is far below that of the practitioner.  The practitioner's failure to advise the prospect of the risks inherent in the adoption of any recommended strategy is unethical and likely to expose the practitioner to the risk of a malpractice claim.

Florida law requires a disclosure document accompany the delivery of life insurance policies and fixed annuities -- see below for details.

Illustrations & Supporting Materials

An illustration can be thought of as the product segment of the life insurance presentation interview.  Unfortunately, it has considerable potential for ethical lapses.  The illustration may be intended to show the possible growth of cash values, dividends and death benefits of a life insurance policy, or it may show the historic growth of a security.  Regardless of its intent, the important ethical principle is the same: the information provided must be such as to enable the prospect to make an informed decision.  The illustration should be:

balanced, and
such that the prospect can properly assess the product and its suitability for meeting his or her need  

Life insurance illustrations are nothing more than hypothetical constructs that show how the policy would perform under a given set of financial assumptions.  While any product illustrations shown to a prospect should be provided to him for his or her file, it should be made completely clear that the assumptions upon which the illustration is based may not prove to be correct.  Life insurance dividends, costs and interest rates will almost certainly not be as illustrated and may be higher or lower than shown.  

Life insurance product illustrations, because the product is more complicated than a mutual fund, require special care to ensure that the prospect is properly informed.  As an example of the greater care required, consider the illustration of a life insurance policy in which policy dividends are shown paying all of the premium at some point in the future.  If the life insurance agent proposes such a life insurance policy, he or she should illustrate how the policy would perform if the policy dividends actually credited were lower than illustrated.  To do that, the agent would be required to re-run the illustration and use a dividend scale that is lower than the current scale.    

It should be clear that the agent would be ethically required to explain that the premiums do not really stop-nor is the policy paid-up.  Instead, premiums continue but are simply paid by policy-generated dividends, whose use in that way will reduce the policy's total cash value.  Furthermore, the agent would need to explain that a resumption of out-of pocket premium payments might be required if the declared dividends were lower than the dividends illustrated.  

Remaining true to the ethical principle of complete disclosure also requires that any mention of a life insurance product's being tax-advantaged have a disclaimer.  Such a statement must be accompanied by a full explanation of the conditions required to be met to qualify for those tax advantages.  The explanation would need to include information about the tax advantages of the illustrated policy if it were to become a modified endowment contract.  The statement that a life insurance policy has income and estate tax advantages could easily mislead the prospect.

Insurer-provided product illustrations normally present few ethical problems principally because they are insurer-provided.  The significant ethical issues generally arise when the illustration is not insurer-provided but is created by an outside vendor or by the agent.  Insurers often prohibit the use of illustrations created by their agents unless the illustrations have been approved by the sponsoring company.  The obvious reason for the prohibition is that company-created illustrations contain important information that helps provide a balanced and complete presentation of the product to the prospect.  

The product illustrations used by the practitioner should only be those provided by the sponsoring companies.  However, a practitioner may sometimes find it desirable to present information of a supporting or ancillary nature to the prospect.  These supporting illustrations present a large area of ethical concern.  In order to comply with ethical requirements, these supporting illustrations should be:

balanced and complete, and
such as to present the information in a manner that enables the client to understand the situation as it truly is.   

An example of an illustration that is unbalanced is one that presents only the benefits of an offering without consideration of the attendant costs.  It would be unethical to present that kind of illustration to a prospect.  

Any sales literature used by the practitioner-including agent-created supporting illustrations-should be submitted to the companies whose products are illustrated for their input and approval.  While many companies require submission of sales literature, the practitioner should submit the point-of-sale supporting information used to all of the companies represented, whether or not they require such submission.  Insurers are generally better equipped to assess the ethical and legal pitfalls inherent in the literature.  And, we shouldn't forget that the agent has an ethical and legal duty to those companies that could be held liable for his acts by virtue of the law of agency.


The principles and examples that we have considered represent many of the common compliance issues that present themselves during the sales process up to the point at which the prospect signs the application.  A large percentage of ethical issues and compliance-related errors and omissions claims arise out of the practitioner's conduct following the sales interviews.  They arise principally out of two critical problem areas:

failure to obtain proper coverage, and
failure to maintain proper coverage.

These problems occur more frequently on the property & casualty side of the business; however, they can occur on the life insurance side as well.  Failing to obtain coverage is usually caused by one or more of the following:

a failure to properly analyze the client's situation and the risks involved
failure to request the proper coverage
a delay in requesting any coverage for a period of time, or
not receiving the proper coverage from the insurer

Failing to maintain coverage usually occurs because of a failure:

to renew coverage on a timely basis resulting from glitches in the mechanical operation of the agency, or
to notify the insured of non-renewal

Although these are not particularly significant areas of ethical or compliance breaches for the life insurance agent, such is not the case in the property & casualty business.  These two compliance problems account for about 35% of all errors and omissions claims for property & casualty agents.  


To minimize the opportunities for misrepresentation of life insurance policies, the legislature passed the General Life Insurance Solicitation Law. Florida Statute 626.99  This act requires insurance companies to provide prospective purchasers with information regarding coverage, rates, and suitability to the purchaser's needs. Insurance companies, and their agents, must deliver disclosure documents to clients when soliciting ordinary (individual) life insurance or fixed annuities. This law does not apply to variable annuities, variable life insurance, group life, credit life or policies issued to qualified retirement plans such as pensions, Keoghs, etc.

Insurance companies must provide life insurance applicants with a "Buyer's Guide" and a "Policy Summary" either:
(1) before accepting an initial premium deposit, or
(2) upon delivery of the policy, if the policy can be unconditionally canceled by the applicant within 10 days, with full refund of premium.

Purchasers of fixed annuities receive a "Buyer's Guide" and a "Contract Summary". Fixed annuities must contain a provision for an unconditional refund for at least 10 days.

 The Policy Summary titled "Statement of Policy Cost and Benefit Information" must contain, at a minimum:
name and address of the agent soliciting the application (or if no agent is involved, a means for the applicant to contact the company),
full name and address of insurer (or administrative office),
a short descriptive title of the premium and benefits of the policy, e.g., "single premium whole life", "five-year renewable term", etc.,
annual premium payable for the basic policy and each rider (listed separately) for at least the first 5 years,
guaranteed death benefits,
cash surrender values and other policy benefits,
effective interest rate on policy loans,
projected dividend payments (and a statement that dividends are not guaranteed), and
insurance cost index comparisons.

"Buyer's Guides" must be presented in a format similar to the model guide adopted by the National Association of Insurance Commissioners.