When A Client-advisor Relationship Gets Too Close

Published by Investment Executive

I am a big proponent of advisors fulfilling know your client obligations in a more meaningful way than just filling out a form. Serving a client as a trusted advisor means knowing them better and having a deeper kind of relationship.

However, conflicts of interest can occur when advisors get too close to a client. Sometimes you need to take a step back to identify and resolve potential or actual conflicts of interest, even though it might seem that the client needs you.

We all know that conflict of interest rules require advisors and dealers to take steps to identify existing and foreseeable material conflicts, and resolve them in the client's best interests. If that cannot be achieved through controls or otherwise, then the conflict must be avoided.

It can be difficult to identify a conflict, or the potential for one. Sometimes advisors find themselves embroiled in conflicts that they have no idea how to resolve.

The best thing is to identify the conflict in advance, and avoid it. If that's not possible, resolve the conflict with the support of your supervisors, compliance officers and lawyers.

Do not try to resolve it yourself. That can lead to allegations by the dealer and regulator that you were trying to hide the conflict from the dealer. It is better to shine a light on it and take advice. That is because from what I have seen, once a relationship passes a certain point, it can be difficult to pull it back. Here's an example.

Friendly neighbour

Melissa is your client. She is an engineer, married with two children. She is also your neighbour, and her husband is your very close friend. After 10 years of marriage, her husband (who is not your client) decides to move to Australia and start over. Melissa is divorced and is left as the sole parent and sole financial provider.

Melissa is stressed. She begins to lean on you — and you want to be helpful to her at a difficult time. She is having trouble doing all her chores, so you try to help. When you go to the grocery store, you regularly ask her what she needs and add it to your shopping list.

Melissa insists on paying you back with e-transfers from her bank to yours. She suggests that you come over on a Friday night and watch a movie. When you arrive at her house, it feels a bit like a romantic get-together. The next day, she texts you and you do not respond.

As you pull away from the relationship, the market goes for a tumble. She is still texting you, but you do not respond. Melissa loses money in her account and blames you.

She sues you, your supervisor and your dealer. Her claim alleges that you were romantically involved and, therefore, you breached your fiduciary duty.

You are registered with Canadian Investment Regulatory Organization (CIRO), which asks for copies of all texts and bank statements. It is a violation of your dealer's policy to text clients. And your bank statement shows the e-transfers between you and your client.

This was a real case — I have changed the facts and the name to avoid identifying anyone. It did not end well for the advisor.

Best intentions

In another case, an advisor got too close to a client who was having business difficulties. Out of the goodness of her heart, she loaned the client money interest-free.

Another advisor got too close to an elderly client, who insisted on paying the advisor for his help. The advisor was named as the client's executor.

You might think that in each of these situations, the advisor was just doing what was best for the clients. However, all these examples present a closeness that later led to litigation and enforcement proceedings by the regulator, jeopardizing each of the advisor's licence, reputation and livelihood.

Catch these types of situations and resolve them before they turn into a potential infraction:

1. If you have a romantic interest in a client, tell your supervisor and arrange for the client to move to another advisor. It is better to do this before any problems develop in your relationship. That way, if the market doesn't cooperate or the client has a complaint, the waters are not muddied by the relationship.
2. If your best friend needs a loan, consider redoing his personal financial plan to free up some cash or suggest a loan from an institution.
3. If you decide to help an elderly client and become worried that the relationship is getting too close, discuss this with your supervisor and take the dealer's advice on how to manage the relationship. You might encourage the client to call his relatives or hire a helper to do errands. Or, your dealer may direct you to send a computer literate client app links to order what he needs online. Let your dealer take the lead, and follow its direction.
4. If an elderly client appoints you as executor, do not accept the appointment. Instead, contact your dealer and take direction from the compliance or legal department.

Tell your dealer as soon as you recognize the conflict and take the dealer's direction. You may also need to get outside legal advice, to help resolve the conflict in the client's interest.

You are an entrepreneur serving clients, which makes it difficult to identify the potential for conflicts and say no in a way that doesn't negatively impact a relationship. But if you're not careful, you could find yourself risking your relationship with your dealer, impacting your livelihood, licence and reputation.

For more on your conflict of interest obligations, see National Instrument 31-103 and 31-103CP, investment dealer rule 3100, Part B and the joint Canadian Securities Administrators and CIRO Staff Notice 31-363.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.