Ethically speaking: Unconsenting advisors

(December 2006) We’ve been asking FCSI designees from coast-to-coast to respond to your ethical conundrums. In our last column, we posted an FCSI’s advice to an advisor with a client spouse who wanted to withdraw funds from a spousal RRSP, without the the client’s knowledge. Many of you e-mailed us about this column — voicing some concerns. We’ve posted a few of those comments this month along with the FCSI’s response.

Here’s what our FCSI, Catherine Johnston, Investment Advisor, RBC Dominion Securities, Peterborough, Ont., originally suggested:

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, the client 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 You need three years before funds can be withdrawn without being taxed in the hands of the contributor at his/her higher marginal tax rate.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 with the wife 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?

And here are some of your responses:

J.G. (Gerry) Connor, FCSI, D.T.M, president, Connor Financial Corporation, Victoria, B.C.:

I disagree with your FCSI’s response. The contributor should and must be informed of all actions on the spousal RRSP along with the account holder. What advisor would open such an account without this clear understanding? The tax implications link the contributor and applicant. The contributor would also want to have trading authority on the spousal RRSP.

Also, note that the three-year rule applies to any spousal RRSP contribution made, not just into the subject account.

John DiNovo, CLU, CH.F.C., Banwell Financial, Toronto:

I take issue with the suggestion that the advisor may want to fire the client. I’m not sure, without setting up the conditions by contract in the beginning of the relationship, how one can fire a client. I work in the MFDA channel, and if a client doesn’t transfer to another dealer, there is little you can do about it. I’m not sure that documenting a notice to the client that you will be absolved of all responsibilities regarding their account while it still sits on your books will do the trick.

While respecting Catherine’s advice, I would still feel more comfortable following it, if it came from a lawyer.

Denis Beaulieu, Lifeline Financial, Winnipeg:

I have been a financial, insurance and pension advisor since 1960 and find your “ethical dilemma” over spousal RRSPs a manufactured tempest in a teapot. Manufactured because of the perversions this confidentiality legislation imposes on sane, responsible actions.

When such a plan is applied for, the representative should explain to both people future contribution and withdrawal actions by any one of them could have a major financial impact on the other person. A document should then be presented by the broker for both to sign allowing the broker to share information in a timely manner when actions by one of them has a direct financial impact on the other’s income tax.

In reality, you are counselling it is ethical for the fire department to not respond when your house is on fire because it is unlawful to reveal to your neighbour, (closely involved in a house 10 feet away to whom you also provide financial advice) the changed status of your assets.

My signed form allows everyone to sleep nights, and remain as clients.

Catherine Johnston, FCSI, responds:

According to federally regulated privacy policy, (click here to view this information), once a spouse makes the contributions to his or her partner’s RRSP account, the contributing spouse has given up control over the assets. At the onset of the relationship, I would explain to the client the rights and limitations of an RRSP spousal account.

Having the clients sign documents allowing the investment advisor to share information as suggested, is an interesting suggestion and a viable solution. From reading the scenario, I would suggest that Lilly has verbally revoked any authority to permit the sharing of information as she mentioned to the IA that she did not want her husband to be aware of the withdrawal and that she would find a way to replace the funds in the future.

Furthermore, based on the way the account has been set up in this scenario, (i.e. registered in Lilly’s name versus having the husband set up as a Trading Authority or an Interested Party) we have an obligation to follow her instructions without disclosing to the husband realizing that these actions may negatively impact her husband. Confidentiality rules are paramount and must be adhered to regardless of any potential outcome.

>> Related Articles…

• Ethically Speaking: Unconsenting adults • Ethically speaking: Trailer talk • Ethically speaking: Grievous gifting? • Ethically speaking: Cut loose or cut out?

As an IA for a large brokerage firm, it is true that I need to keep current on Canadian tax rules to be able to offer suggestions on how clients can apply rules to save tax. However, as I am not licensed by the IDA to give investment tax advice to clients, it is our practice to always encourage clients to consult with an independent tax professional on these matters where appropriate.

Lastly, investment advisors have an obligation to maintain a successful relationship with clients. If a client is secretive and tries to hide information from a spouse, and I feel this may negatively impact his or her spouse, it may put me in a position where I would question the success of our continued relationship. As stated in the account agreements, we have clients sign when they open an account, and the advisor or the client may end the relationship at any time. In situations where there clearly is not going to be a good fit, the client is provided with formal notice which includes ample time to locate an alternate investment advisor and/or financial institution. It is of note that in these exceptional and unsalvageable situations the firm would generally agree to cover fees and costs associated with the transfer.

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

(12/14/06)