Ethically speaking: Trailer talk

(August 2006) We asked FCSI designees from coast-to-coast to respond to your ethical conundrums — everything from culling clients, to specific fund recommendation and a host of suitability issues. In this month’s column hear what FCSI Michele Vincenti suggests for an advisor who is aggressively promoting a poor-performing fund to her clients.

You Wanted To Know… Investment advisor Sheila has placed a significant amount of her client’s holdings into the Wings’ Balanced Fund*. The fund pays a healthy trailer fee for those accounts with holdings above a certain threshold level. However, the trailer fee drops off considerably once the invested proceeds drop below the threshold.

The fund’s five-year track record places it near the bottom in terms of quartile ranking and it has underperformed its benchmark during the past four years.

In order to maintain this trailer fee status, during these past several years, Sheila has aggressively marketed the fund, even as it continues to perform poorly. She believes the fund’s long-term performance will improve greatly over the long haul.

Has Sheila violated her fiduciary duties to her clients by continuing to recommend the poor-performing Wings’ Balanced Fund even though she is steadfastly confident its performance will significantly improve in the future?

Michele Vincenti, FCSI, Victoria, B.C. Responds:

Financial advice is a very serious matter. The client who is relying on Sheila’s recommendations is doing so because they deem her to be their trusted advisor.

Before we can answer the question of whether this advisor has violated her duties to her client, we need to investigate if Sheila truly believes that the Wing’s Balanced Fund will improve in the future. If she performed due diligence on the fund and her research indicated that the fundamentals are sound, then it is a matter to determine if the healthy trailers were, and continue to be, an important factor for Sheila in recommending the fund.

If Sheila’s recommendations are biased by the healthy trailer, then yes, she has violated the fiduciary duty to her client. One of the most important requirements an advisor must possess is that the client’s best interest is always given priority. Furthermore, advisors must disclose all real and potential conflicts of interest, in order to ensure fair and ethical handling of all issues related to the comprehensive wealth management of their clients.

There is no justification for an advisor who will take personal advantage of being trusted and/or who will gain financial wealth while betraying the client’s trust.

>> More Ethically Speaking…

• Ethically speaking: Grievous gifting? • Ethically speaking: Cut loose or cut out?

For Sheila, there is no ethical dilemma; she must simply follow a professional code of conduct. She must make recommendations in the client’s best interests regardless of the potential commissions or trailers waiting in the Wings (excuse the pun).

For the good advisor, the most important reward is the client’s ability to achieve his or her goals. It is about the privilege of being trusted, and the honour of helping clients to realize their dreams.

If an advisor ever encounters an ethical dilemma, I recommend using the following framework :

1. "Do what’s best for the greater number of people." 2. "Follow your highest sense of principle." 3. "Do what you want others to do to you."

Also, remember that William Shakespeare once said: "Good advisors lack no clients."

Michele Vincenti, FCSI, CFP, CIM President, Alvana Business Consulting Inc. www.alvanabusinessconsulting.com

* The Wings Balanced Fund is not an existing fund but merely a pseudonym to help illustrate the ethical issue presented.

¹ Rushworth M. Kidder, How good people make tough choices, New York, NY: A Fireside Book

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

(08/01/06)