Your long-time client, whom you consider a friend, approaches you with an enticing proposal: equal partners in a business for specialty pet food. In making your decision, what do you consider?
Managing director, standards at Financial Planning Standards Council, Toronto
This creates a clear conflict of interest, because the advisor would have a vested interest in the outcome of the business and would also be advising the client financially.
For CFPs, FPSC Rule of Conduct 8.1a requires that the advisor disclose the conflict in writing. The advisor should also have a full and transparent discussion with the client.
The advisor can proceed as both the client’s advisor and business partner as long as the client is fully informed and has waived the conflict in writing. The client’s written consent must include a description of the conflict.
The advisor should be aware that accepting the business proposal potentially means ending the advisor-client relationship. For example, if the advisor doesn’t get the client’s waiver, it means choosing one role or the other.
Business development manager for Western Canada, Croft Financial Group, Calgary
For those who aren’t CFPs, the industry expectation is that you explain to clients potential conflicts of interest. You don’t have to eliminate conflicts, but you have to discuss and manage them.
The acceptable way to proceed is to bring the conflict to the client’s attention and let them decide whether to proceed. If the client decides to go ahead, a universal shareholder agreement for the business should be reviewed by a third party.
Even with such disclosure, I personally wouldn’t continue to be both advisor and business partner because the conflict still exists.
Assuming the client wants to proceed, to decide which role to keep, the advisor should consider the opportunity cost of each relationship. For example, the advisor should assess the cost of ending the advisor-client relationship versus forgoing the business partnership, in addition to any risks associated with each.
If the business opportunity comes up short in the assessment, the advisor should decline but offer to
assist the client, as an advisor, when a business partner is found.
Alternatively, the advisor might make the decision based on ethics. For example, perhaps the advisor is motivated to create pet food from high-quality ingredients sourced ethically. That’s a valid basis for deciding on the business partner role.
Play by the rules
MFDA Rule 2.1.4 says approved persons should ensure conflicts are addressed by “responsible business judgment influenced only by the best interests of the client.”
IIROC’s Dealer Member Rule 42 says conflicts that can’t be addressed “in a fair, equitable and transparent manner, and consistent with the best interests of the client” must be avoided.
In the FPSC’s Standards of Professional Responsibility, a “conflict of interest” (for rules 8 and 8.1) means “an interest that may adversely affect a CFP professional’s judgment and/or obligations to a client.”
Guidance to Rule 8.1a says potential conflicts exist where the CFP’s duties to clients “are in conflict or impacted by the duties or loyalty owed” by the CFP professional to a third party or with the CFP’s own interests. A given example is where the CFP has a personal or financial interest in a client’s business.
After “complete disclosure of all information known” to the CFP regarding the issue, the client can decide to keep the CFP as an advisor notwithstanding the conflict.
That being said, the guidance strongly discourages such relationships: “As a matter of best practice, CFP professionals should decline to enter into a professional relationship with a client where there is an existing conflict of interest or where a conflict of interest is likely to materialize that cannot be mitigated.”
Thanks to Rod Burylo for suggesting this scenario. To contribute your own ethical dilemmas or conduct quandaries, please email Michelle Schriver.