Ethically speaking: Unconsenting adults

(October 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 Catherine Johnston suggests for an advisor who is dealing with a less-than-ethical client spouse.

You wanted to know…

A 50-year-old, divorced client, Larry, remarried and brought in his new wife, Lily, to meet his financial advisor to set-up a spousal RRSP. Two years earlier, Larry and the advisor had outlined a financial plan to reach Larry’s goal of retirement at age 60. He was willing to work longer if necessary to bring his assets to the level that would support his current lifestyle.

During their first year of matrimony, Larry encouraged his new bride to become involved in the decision making and ongoing management of the account. This was new territory for Lily as she had never held an investment account and she couldn’t believe the control her husband bestowed upon her — basically he would write the cheques while she’d meet independently with the advisor to discuss the investments.

But it didn’t take long before Lily phoned the advisor and requested $5,000 be withdrawn from her spousal RRSP to give to her daughter. The advisor explained that taking out money Larry had contributed would have negative tax implications for him and that she should talk directly to her husband first. But Lily insisted the funds be withdrawn and assured the advisor she’d be able to find a way to replace them in the near future.

Needless to say, the advisor was stumped. Should he blow the whistle on her and tell Larry what was happening? Or was that a privacy infringement? Obviously this constituted a major ethical and compliance dilemma and the advisor felt trapped. On the one hand, he was faced with the paramount principle of client confidentiality, yet he felt terrible about allowing Lily to withdraw the funds, a move that could negatively affect his client’s retirement plan. What were the advisor’s options in handling this sticky situation?

Catherine Johnston, FCSI, Peterborough, Ont. Responds:

Advisors face a variety of ethical and legal concerns on a daily basis. This is a very difficult issue since respect for a client’s privacy rights is a fundamental principle of the financial services industry. As the account belongs to the wife, it is the advisor’s duty to keep all information concerning the account confidential — even from the spouse who contributed the funds. However, Larry should have been made aware at the onset of the relationship that transactions and conversations with his new wife cannot be disclosed without proper consent from the client.

As the advisor, there are other issues that need to be considered such as how the withdrawal will impact the spouse’s tax situation. You need three years before funds can be withdrawn without being taxed in the hands of the contributor at his/her higher marginal tax rate. How will the withdrawal impact the objective of income splitting at retirement? What is the long-term effect on retirement plans? What if this withdrawal causes him to have to work longer? Will he hold you accountable for not reaching his goals in the timeframe expected?

I would suggest that the advisor hold a personal meeting, alone, with the wife prior to her withdrawing the funds, at which point he would ensure that she understands the attribution of income to her husband and the financial impact the drawdown in capital will have on their joint retirement plans.

I would follow this up with a joint meeting with both spouses to help them to determine their mutual financial needs and goals. Do they have an emergency fund set up in case one of them requires funds? Will they need cash to start up a business, educate a child etc.? How much do they need to cover retirement expenses? The meeting should include a discussion of the priorities they wish to have with their money and what sacrifices they would be willing to make to achieve these goals. In this way, their goals will come together and financial challenges will be identified.

If following the meeting, the wife chooses to proceed with withdrawing the funds, the advisor should at the very least make sure to document the discussions regarding the situation including the implications of the withdrawal.

In addition, any advisor in this situation needs to consider whether he or she really wants a client who is secretive and tries to hide information from a spouse. If you find yourself in this situation, you may indeed need to choose whether continuing a relationship with this client is in your best interest or in that of your original client. What is the liability to you? Moreover, will you be able to sleep at night?

Catherine Johnston, FCSI, Investment Advisor, RBC Dominion Securities

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

(10/03/06)