Certified financial planners (CFPs) have shown heightened awareness of conflict of interest guidelines since the Financial Planning Standards Council (FPSC) revised some of its rules on standards of professional responsibility a year ago, a seminar was told.
In June 2016, FPSC made changes to some of its rules to clarify potential conflicts of interest situations and the steps that CFPs should take in cases where these situations arise with new or existing clients. Specific examples are given in instances where the CFP is acting on behalf of two clients at the same time, on issues of confidentiality and how to manage conflicts of interest.
“The buck stops with you,” Damienne Lebrun-Reid, FPSC’s director of standards and enforcement, told advisors at a March breakfast seminar.
Letter of engagement
In reviewing the revised rules, Lebrun-Reid said CFPs should start with a letter of engagement, outlining exactly who the new client is, especially in cases where there are couples, business partners or family members – areas where the potential for conflict of interest are greater, said Lebrun-Reid.
The letter should also specify the services CFPs will offer as well as the ones they won’t provide, and in doing so, give clear direction to the client. “You might be surprised to learn the number of complaints we receive about the services that were not provided,” she said.
A conflict is defined as any interest that may adversely affect the advisor’s judgment or obligations to their client. An example of a clear conflict is if an advisor has ex-spouses as clients and the advisor is helping one with, say, an equalization payment, without the other knowing about it, she said.
But in cases not so easy to identify, red flags should at the very least spark a discussion with clients to understand where each person stands.
Since the revisions came out, Lebrun-Reid said FPSC has received a number of questions from CFPs on exactly what constitutes a conflict. Is it a conflict to take on a friend or family member as a client? Is taking on a client the advisor doesn’t like a conflict? One interesting inquiry came from an advisor requesting guidance on whether to take on a client who was also the CFP’s landlord.
In cases of family members, LeBrun-Reid said it may be feasible to work with a client’s spouse or a family member as long as the advisor anticipates possible future conflicts. She must also document the steps she has taken to identify those conflicts and disclose them to the client. After that, written permission must be given by the client to continue.
“When considering whether you should accept an engagement or continue in an existing engagement, ask yourself the following question: could the duties you owe your client be negatively impacted if you continue in that relationship? If there’s a risk that your duties to your client may be adversely affected by your own interest, your duty to another client [or] your duty to a third person, you are in a potential conflict of interest situation.”
The issue of conflicts of interest can be especially acute in cases of family businesses or if an advisor has a number of clients from the same family, said Lebrun-Reid.
“If you are representing a daughter who stands to inherit from the parents, do you think there’s a potential conflict there?” Lebrun-Reid said in response to a question from an advisor in the audience, whose business is largely made up of families.
Under the revised rules a CFP must immediately stop providing services to a client if a conflict arises between the client and the advisor or in situations where there is a conflict of clients in a joint engagement. The CFP must tell the client in writing of the conflict and refrain from providing services until the client provides written consent to continue.
A second member of the family may have his own assets and will likely not cause a conflict of interest, said Lebrun-Reid. In that case, she strongly recommended documenting the process.
“I appreciate that that’s onerous and I appreciate it might mean you cannot take on someone as a new client, but … [the rules] are there to protect you as much as your clients.”
What advisors should not do is ignore a conflict or be motivated in their own interest of building their book because that in itself is a clear conflict.
Consent must also be given to share the client’s information with another professional, even in the same office, said Lebrun-Reid.
“We often hear…that there was an understanding that information would be shared, or implicit consent to share the information,” she said. “We hear this particularly often in the case of joint engagements – that one of the parties who is less active in the financial planning process implicitly consented to information being shared with the other client who was the more active client.”
Although verbal consent during a telephone conversation will work temporarily, it must be followed up with a written note, she said.
One of the most important duties a CFP professional has is to document their discussions with clients, not just in potential conflict of interest situations, but in all cases, suggests Lebrun-Reid.
“I know you think this is an annoying thing that you might hear from a lawyer – but it is really critical because it is what will allow you to remember what your thinking was and it will allow you to have immortalized that thinking at the time that it occurred.”