The Ripple Effect: Potential Consequences of a Conflict of Interest

Journal of Financial Planning: September 2020


Frank C. Bearden, Ph.D., CLU®, ChFC®, is an adjunct professor for graduate degree programs at the College for Financial Planning. He has published articles, given presentations, and conducted qualitative and quantitative research regarding conflicts of interest.

JOIN THE DISCUSSION: Discuss this article with fellow FPA Members through FPA's Knowledge Circles​​​​. ​​​

To understand the importance of a conflict of interest in professional practice, a financial planner should understand the potential consequences of a conflict of interest to the client and to the planner. A conflict of interest is an interest a financial planner has or is considering that is likely to interfere with the fiduciary duty the financial planner has to a client, to the extent that the fiduciary duty will not be enacted in the client’s best interest.1

The consequences of a conflict of interest can be visualized through the metaphor of the ripple effect. To be fully understood and appreciated, each of these ripples should be carefully considered.

Let’s consider a hypothetical example. John is a financial planner and CFP® practitioner who has formed a financial planning engagement with an individual named Bill to discuss life insurance planning. John and Bill have ownership of a small and very profitable shopping center. Bill has controlling interest and the right to purchase John’s interest at any time. John thoroughly discussed the conflict of interest that the engagement poses for John, due to their joint real estate interest. He asked for Bill’s consent before he agreed to provide any financial advice, which Bill provided verbally.

As a result of the life insurance planning John provided for Bill, John recommended that Bill apply for a $5 million life insurance policy for Bill to provide for his family, in the event of an untimely death. John is a licensed life insurance agent and thus recommended to Bill that he complete and file the application. Bill agreed, and stated he plans to avoid mentioning a significant health incident he had five years ago in order to secure as low a premium as possible. The significant incident was a heart attack. Bill reasoned that he has recovered from the incident so there is no deceit involved. John believes this would be fundamentally dishonest and violate his code of ethics with CFP Board. However, the real estate venture he shares with Bill provided half of his income last year, which he does not want to lose. For this reason, he agrees not to mention Bill’s heart attack in the life insurance application.

First Ripples

The first ripples of consequence that we should consider with any conflict of interest are those that could result to the client and/or his or her family. In this example, the first ripple could be the insurance company declining Bill’s life insurance application due to omission of significant medical history, if discovered. Insurance applications often ask for an attending physician statement, which may disclose facts about Bill’s heart attack. Many insurance companies are members of MIB Group (formerly the Medical Information Bureau) and pertinent insurance-related information may be secured from this source.

A second ripple that could result to Bill may be an increased rating of the life insurance coverage due to consideration of Bill’s heart attack five years ago. This would produce a higher premium and could remain within the insurance company’s records and those of MIB Group for some time.

This could lead to a third ripple for Bill. The maintenance of recorded history of the untruthful application with the insurance carrier and MIB Group may influence any additional efforts by Bill to apply for life insurance.

A fourth ripple or consequence may develop for Bill’s beneficiaries. If he dies within two years of the policy being issued, the policy would have been in the contestability period, and the insurance company would have the right to investigate the claim. Upon investigation, if Bill is found to have materially misrepresented his health history or other pertinent information at the time of the application, the insurance company could reduce the death benefit paid to his beneficiaries or deny the claim. None of these potential consequences were discussed by John with Bill.

Ripples for the Financial Planner

Now we should consider the consequences that may develop for John. A first ripple of consequence would develop in applying for the life insurance for Bill. John would have provided service to his client involving deceit, which violates the first, second, third, and sixth provisions of CFP Board’s Code of Ethics and Standards of Conduct.2 If his behavior is reported to CFP Board, John would be subject to the enforcement process of the disciplinary rules and procedures.3

A second ripple that may occur for John involves possible future litigation he may receive from Bill for the failure to discuss the possible consequences before the fact. John could also receive a notice of legal service from Bill’s family, in the case of a death claim for Bill.

The third ripple would develop from professional consequences John may experience. In witnessing the dishonest insurance application, he could lose his insurance license and perhaps face litigation from the insurance carrier if the deception were discovered.

Concluding Comments

A conflict of interest is not an interest that definitely will produce the type of behavior reflected in this example at any specific period of time. However, a conflict of interest is an interest that is likely to lead to behavior at some point in time that will interfere with the fiduciary judgement a financial planner provides to a client. How and when that interference will occur is usually not known.4 In this column, I’ve made an effort to provide a hypothetical example of the type of behavior that can occur to underscore that a conflict of interest is likely to lead to professional behavior that does not comply with the fiduciary standard of service.

A financial planner may not be sure if a concurrent engagement rises to the level of a conflict of interest. In that case, discussing the matter with a respected financial planning peer is a good idea. The planner should also ask him or herself how the engagement would appear to knowledgeable financial planners.

If a financial planner decides to make full disclosure of a conflict of interest and obtain the client’s consent before providing financial advice, which the example financial planner here did, the client has the benefit of not being deceived, which is a significant benefit. However, disclosure alone will not eliminate the conflict of interest.5 


  1. See the introduction (pages 3–19) to the 2001 book, Conflict of Interest in the Professions, edited by Michael Davis and Andrew Stark, published by Oxford University Press.
  2. See
  3. See
  4. See endnote No. 1.
  5. In addition to endnote No. 1, see the 2017 paper “Policy Solutions to Conflicts of Interest: The Value of Professional Norms,” by Sunita Sah published in Behavioural Public Policy. Available at
Professional Conduct & Regulation
Career stage
Learning / Aspiring