Ethically speaking: Loose lips

(February 2007) We asked FCSI designees to respond to your ethical conundrums — everything from culling clients to specific fund recommendations and a host of suitability issues. In this month’s column hear what FCSI John Hogarth suggests for an advisor who is dealing with a not-so-forthcoming client.

You wanted to know…

Colleen is an investment advisor who uses a financial planning approach to provide her clients with a complete solution for all of their financial needs. To do this effectively, Colleen needs to know as much as possible about each client’s financial situation. She expects her clients to reveal all of their current assets (i.e. RRSPs, investments, real estate, life insurance policies, RESPs, pension, cash flow, etc.), debt and long-term wealth goals including succession and estate plans. Clients are generally comfortable sharing these details since they help an advisor develop a plan that meets their unique financial needs.

Colleen recently met with a prospective client who was hesitant about sharing certain details about his financial situation because he was involved in an ongoing family dispute. Specifically, the person said he could not share some specific details about his retirement assets and estate plan.

Should Colleen take on this prospect as a client, even though he will not reveal all of his personal information? Can an advisor do a good job for the client who does not paint a clear picture of his or her financial situation?

John Hogarth, FCSI, Toronto, responds:

As a new investment advisor, it is hard to turn business away — even seasoned IAs are tempted to rationalize away small inconsistencies to take on what otherwise appears to be a straightforward new client. But, can Colleen do a good job and properly advise this prospect with incomplete information about such key areas as his retirement assets and estate plan? The answer is no.

How can Colleen advise on how much to save, what to contribute to an RRSP, what risk to take, what is an appropriate amount of insurance, etc.? Colleen is obviously professional, and gets the information necessary to make valuable recommendations to her clients. In fact, often a good IA like Colleen will get a lot more information than she sometimes wants or needs.

Asking the right questions and making clients feel comfortable are two of the most important aspects of the IA’s job.

Quite clearly, Colleen should be empathetic to her prospect’s dilemma and ask him to return when he feels ready to discuss his material financial details in full. Otherwise, not only does she risk giving him flawed financial advice, her professional reputation could also be at risk.

We had a situation recently with some similar circumstances. About two years ago, one of the advisors in our branch accepted new business from a prospect that he did not know. The advisor, Steve, met with the prospect Michael on several occasions before the RRSP account was opened. Michael would provide information on his RRSP account and a little information on his future goals, but was very reluctant to reveal anything about his personal life and his full financial situation.

More Ethically Speaking:

• Unconsenting adults, part 1 • Unconsenting adults, part 2 • Trailer talk • Grievous gifting? • Cut loose or cut out?

Concerned but undaunted, Steve decided to take the account. It turned out to be a $400,000 account. Steve thought he had found a good client. Unfortunately for Steve, the amount was the best thing to come out of the relationship. When the account was transferred in kind, Michael refused to allow any of it to be reallocated. Further, he would not open up and provide any information that was useful to Steve. He started to become demanding about any fees being charged and became angry about the lack of performance he perceived, but still refused to let Steve make any changes to the account.

After dragging this situation out for more than a year, Steve, with his manager’s help, fired the client. His production for the year stalled at approximately the same level as the year before, but it rose substantially the following year. In a subsequent conversation with his manager, Steve recognized that the time expended on this one client had taken a year of growth away from his business.

He now restricts his new accounts solely to clients he feels comfortable with. He also realizes that he doesn’t need to accept every new account and every new asset to be successful. What he needs are clients who share his values and who are willing to share pertinent information with him.

John Hogarth, FCSI, ScotiaMcleod, Toronto

FCSI is a registered trademark of CSI Global Education. Fellow of the CSI (FCSI) is awarded to industry professionals who have met set standards for industry experience, advanced education and solid endorsement from their peers and superiors.

If you have an ethical dilemma that you’d like to ask one of our FCSIs, please e-mail your question to heidi.staseson@advisor.rogers.com.

(02/20/07)