Imagine you have a client who has a substantial amount of money invested in a single security. In fact, the value of that security is well over half of his total wealth. You propose reducing his holding in the security and diversifying his investments, but he consistently refuses to take your advice. What should you do?
a) Terminate the relationship
b) Ask for signed acknowledgement of his refusal
c) Use options together with periodic sales
d) Maintain the status quo
At a session focusing on common ethical dilemmas, 78 per cent of congress delegates responded that they would ask the client to sign a document acknowledging that they had advised him to reduce his holding and diversify his investments, but that he had declined to take the advice.
Dan Candura, a US-based Certified Financial Planner and ethics trainer said the response of delegates at the FPA congress was common, but was not necessarily based on sound ethical principles, such as those set out in the FPA’s code of ethics and professional standards.
Candura said it is not necessarily in the best interests of the client for a financial planner to seek to limit or reduce his or her liability by seeking to have a client acknowledge that they have declined to follow advice provided. It may be a more ethical approach to terminate the relationship altogether.
“If that client isn’t going to follow your professional advice, and the correct advice, then that first choice comes into play,” he says.
“If you’re not going to listen to what I tell you to do, that creates a liability for whom? For you. ‘How hard did you work to convince them? Why didn’t you ever make him do this?’ All this sort of stuff.
“You may need to terminate your relationship with that client. You may need to give that client up, and say: ‘You hired me for professional advice. This isn’t a sales transaction – we’re not looking at big-screen TVs here. This is professional advice. You’re paying me to advise you. I gave you advice and you ignored it; you should find yourself another adviser, because obviously you don’t like my advice’.”
Candura says ethical dilemmas are, by definition, never black and white. But in all cases, ethical behaviour in financial planning rests on three pillars: a code that consists of a set of principles, a set of practice standards, and a set of specific rules that support the practice standards that fulfil the code.
He says the FPA’s code has eight principals: client first; integrity; objectivity; fairness; professionalism; competence; confidentiality; and diligence.
“The practice standards will then set out what we do to deliver high-quality advice to our clients,” Candura says.
“We all know the financial planning process. It starts out at the beginning gathering information about goals, and data. We then go on to analyse that data, [and] use that analysis to make reasonable recommendations about the kinds of things clients can do to improve their situation. If they like those, we implement them, and then monitor them. That’s our circular process.
“Is that process unique to us as financial planners? No, it’s not. It’s a goal-achievement process that’s used by many different professionals – insurance professionals, tax professionals, and architects.
“My son bought a new house and he had to redo the kitchen. He went to one of those big-box stores, and went to a kitchen designer. She used that process. She helped them identify what their goals were; gathered information abut their budget and their space requirements; put together several different plans for how things could work; helped them to implement that, through the store; and then came back to check on how it worked for them. That was the financial planning process.
“The financial planning process itself is not unique. It’s the way we put it together the way we integrate it with the different subject areas – that’s what makes it unique.
“The practice standards help us address client needs, objectives and priorities.
“The practice standards help us provide professional advice and professional services; identify and disclose and manage conflicts of interest. The practice standards demonstrate that we are professionals. They help us recognise and balance factors like cost and availability, along with the sustainability of or practices – we can’t work for free, we have to be able to make a reasonable profit on the work we are doing to maintain that service to those very same customers.”
