A 20-something construction worker walked into Jeff Young's office with the idea of starting an investment plan. But in the course of collecting basic personal information, Young soon learned that the man--a referral--had a child out of wedlock. Young suggested that he consider buying life insurance for the baby. The suggestion wasn't welcome. The man nixed the idea and never came back.
A vice president at WestAmerica Investment Group in Scottsdale, Ariz., Young says he probably could have landed some business by keeping quiet about the insurance. "I don't think he liked what I told him, that his first obligation was to the child," he says.
Young feels he has a responsibility to do the right thing, even if it means pointing out conduct unbecoming on the part of clients or prospects. Which raises an interesting point--in what instances should a broker assume the role of personal counselor or even social worker? And when should a rep merely act as an order taker, slavishly following the instructions of clients, even when faced with an ethical dilemma?
Little has been written on this topic, and it's unclear how much guidance brokerage firms offer their reps. "We have no set policy on it," says Susan Atran, a spokesperson for Prudential Securities in New York. "It depends on what the circumstances are." Spokespersons from six other wirehouses and regional firms wouldn't return phone calls on this topic.
Even if nobody's talking about them, ethical issues can and do crop up with clients regarding personal conduct or other family members. Phyllis Mitchell, a broker with Medallion Investment Services in Ocean City, Md., recalls one instance in which the adult son of an elderly couple asked them for a large loan. All three people were her clients, so she had no overriding fiduciary obligation to any one of them.
But Mitchell noticed that the request was making the parents uneasy, even though they didn't want to refuse their child. So she suggested that they make the loan, but formalize the terms in writing and collect interest. The couple was relieved by that arrangement.
"The financial adviser can be a good buffer for families when there's an uncomfortable financial decision involved," Mitchell says. "I try to find out who needs to be protected."
Soured Spouses, Senseless SeniorsDifficult situations often arise for brokers dealing with clients in troubled marriages. Shawn Daily, an Edward Jones broker in Natchitoches, La., says divorcing spouses frequently worry that the other might start draining a joint account of money, so they ask to be notified about transactions. Daily's response is to inform both spouses while remaining as impartial as possible.
"It's a real quandary because you don't want to pick sides," says Daily, who has a master's degree in social psychology with a focus on marriage and family counseling. "Clients in this situation often perceive favoritism and become paranoid about it." While reps should strive to treat both spouses in a failed marriage equally, they may be forced to express an opinion and thus should be prepared to see one of the clients walk.
Seniors are perhaps the most vulnerable group when it comes to money. That's because many older Americans may have accumulated wealth but lost reasoning skills as they aged. In one case, Young noticed an elderly widow making large withdrawals from her account. "When I called to ask why, she didn't know who I was or what I was talking about," he says.
Young tracked down a relative, who found out that a fraudulent telemarketing group had convinced the woman to send checks to the organization. The relative was able to prevent further losses from the account, but the episode demonstrates what can happen when brokers don't take the time to get involved.
Fighting FamiliesCircumstances involving wills, inheritances and estate planning can be tricky. If an elderly investor is making yearly gifts that favor one child or one set of grandkids, should the rep bring this up? If a client's will clearly favors certain close beneficiaries over others, should the broker ask the person to reconsider?
Intergenerational issues may cause strife so reps need to prepare for wealth transfers. That's why Don Wilkinson, a registered principal with United Planner's Financial Services of America in Newport Beach, Calif., suggests that reps familiarize adult children with the financial affairs of their parents if the latter agree.
"We ask the parents if we can send a letter telling the children that we're the advisers of record, that we handle the parents' assets and that we're available if they have any questions," Wilkinson says. "A lot of the parents say yes to that."
Parent-child relationships that involve gifts can be troublesome. Parents sometimes fail to recognize the consequences when they establish joint accounts with adult children or hand over money as part of a UGMA or UTMA account.
Daily recalls one client who set up an account from which his daughter could draw money for college expenses. Daily noticed some large checks being written and notified the father, who responded by scolding him for butting in. But more large withdrawals followed, and Daily again notified his client, risking another rebuke.
This time, Daily convinced the man to investigate. The father discovered his daughter had moved in with an unemployed house painter, for whom she had purchased a new truck. "Do you open your mouth and risk losing your job as their broker, or do you keep quiet and let them ruin themselves?" Daily asks.
Fortunately, the parent in this case eventually came to appreciate Daily's persistence and admitted that he should have listened sooner.
Imperfect PeopleOther types of ethical concerns arise as brokers learn more about the human flaws or foibles of their clients. For example, should brokers accept people as clients who have thousands of dollars in credit card debt? Young turns away prospects who can't get their basic financial houses in order. "I demand of my clients that they be debt-free," he says.
What about dealing with people who have been convicted of breaking the law? Most brokers would probably reject this notion at face value. But what if the lawbreaker had been punished for his or her crimes, and was referred by a good client?
That was the situation facing Young when a client asked him to invest a maturing CD for her brother, who is serving time as a sex offender. Young admits that he is not eager to get into a relationship with the man. He hasn't had to make direct contact, since the sister has power of attorney. But Young says he did as his client requested, sending the appropriate paperwork to the prison and switching the money into a conservative stock mutual fund.
There are untold types of client situations that raise ethical red flags. That's why it's wise to keep good records of conversations with such clients. "I do take very good notes on why I recommended what I do," Young says.
It's also prudent to discuss troublesome cases with a branch manager or compliance officer. "If you see a little smoke, call the fire department," Daily says. "These things usually are easy to handle if you jump on them." In addition, Wilkinson suggests that reps secure a compliance officer's recommendation in writing and file it away for their protection.
But in many instances where no laws have been broken and no company policies violated, directives from management may prove to be of limited value. Then, it comes down to exercising good judgment and common sense, and discussing unpleasant issues with clients when it's in their best interests to do so. "It's our responsibility to tell people what's the right or fair thing to do," Mitchell says. "Then it's up to them to act."
