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You decide to end a client relationship because the client insists on taking on more risk than they can afford. Your dealer suggests you redo the risk conversation or “repaper the file” to allow the client to take more risk. How do you proceed?
Financial planner, Hartry Foley Financial Ltd., Waterdown, Ont.
Clients tend to think they have a high risk tolerance until the markets drop.
I fired a 60-year-old client who wanted to invest only in precious metals. I instructed him to go to his bank instead to make the investment. I wouldn’t have allowed the investment no matter what compliance said. Worldsource [Financial Management Inc., Foley’s mutual fund dealer] is one of the most compliant dealers, and has suggested that I give up clients because of risk issues, including when the client doesn’t agree with me about risk.
It’s important to find out why a client wants more risk; often, it’s influence from family, friends or the internet. Clients can easily find an article online to confirm whatever action they want to take.
I tell clients that more risk won’t necessarily bring better returns. I show them the returns of volatile investments, like precious metals and tech, and the dollar figures they could lose from their portfolios with these investments. I ask: Are you sure you can handle losing that much?
Recently, when a client wanted to take on more risk for better returns, I reviewed his portfolio and time horizon, and was able to allocate more to equities. I also use dollar-cost averaging and diversification to help reduce risk.
Manager, capital markets, Pinnacle Accounting and Finance, Calgary
If it’s in the client’s best interest for the advisor to terminate the relationship, it should be terminated. The dealer should not only permit that but also encourage and facilitate it.
Good and ethical reasons to end a client relationship include not having the skills, experience, products or registration category that the client needs; not having time to properly service the client; not agreeing on financial priorities or strategy; and inability to address a conflict of interest.
Having strongly divergent perspectives on important topics could also be sufficient reason to end the relationship if such differences would affect the service received. For example, what if the client is a racist or homophobe, or abusive to a partner?
The dealer should permit the advisor to exercise judgment in ending a client relationship, including when the client and advisor profoundly disagree on the degree of risk to take.
If a dealer told me I couldn’t end a client relationship even though it was in the client’s best interest to do so, I would end the relationship with the dealer.
Resolve conflicts between a client’s expectations and risk profile
Determining a client’s risk profile is part of enhanced know-your-client requirements under the client-focused reforms. Risk profile should reflect the lower of risk tolerance (the client’s willingness to accept risk) and risk capacity (the client’s ability to endure a potential loss). A client’s risk profile shouldn’t be manipulated so that higher-risk products can be recommended, the reforms say.
Further, when a client has unrealistic return expectations, a detailed discussion of the relationship between risk and return may be necessary. If a client’s return objectives can’t be achieved without taking greater risk than they’re willing or able to accept, alternatives should be clearly explained, such as saving more, spending less or retiring later, the reforms say.
Prudent professional judgment
Rule 23 of FP Canada’s conduct rules states that financial planners are to implement only those strategies that are “both prudent and appropriate” for the client and that the planner reasonably believes will not materially and negatively impact the client’s best interests.
The rules also say that prudent strategies take into consideration the client’s current situation, goals, needs, priorities, risk tolerance and time horizon. Planners should also consider the client’s values, attitudes and beliefs.
When a planner no longer wants to serve a client, they must provide the client with written notice as soon as possible and make sure the withdrawal of services doesn’t prejudice the client, the rules say.
To contribute your own ethical dilemmas or conduct quandaries, please email Michelle Schriver