Journal of Financial Planning: July 2024
Often, I’ve had financial planners ask me in earnest why they should avoid seeking a fiduciary engagement with an individual the financial planner knows well. This may seem to conflict with providing a well-intended fiduciary service. What isn’t clear about such situations is active involvement with someone such as a family member, a business partner in another business, and even a close friend can pose unexpected difficulties when the financial planner is seeking to develop fiduciary service. We need to keep in mind that while such relationships are personally valuable and important to us in a non-fiduciary capacity, these same people may have little sustaining interest in our financial planning services over time. As a result, these types of relationships may become a conflict of interest if the fiduciary wishes to develop financial planning services while the client expresses more interest in personal, non-fiduciary involvement (Davis 2001) or just an unprofitable client if the client has little ongoing interest in her or his financial planning development.
I would like to pose a reminder to financial planners once more to be vigilant regarding conflicts of interest, with a few examples. This way we can clearly see that a fine non-fiduciary business or personal relationship that has value of its own right through friendship or other business involvement may also hinder our efforts to serve as the client’s financial planner and fiduciary (Bearden 2001; Vessenes 1997).
Solicitations from a Family Member
We will begin with a fairly easy situation to understand. John is an active, successful financial planner. He has an uncle named Thomas, who owns a thriving business in the small city where John lives. John has been a financial planner and served as a fiduciary for 10 years. He was surprised one morning when his uncle asked if he would consider providing financial planning and fiduciary advice on his investments.
John was personally close to his uncle, and for this reason he was hesitant to provide fiduciary advice to him. Instead, he asked his uncle if he would consider speaking with one of John’s financial planning and fiduciary friends, a person named George. George was an established financial planner and a fiduciary fully capable of providing fiduciary advice to John’s uncle.
George expressed some interest when John shared the approximate size of his uncle’s investment portfolio. However, when George asked if Thomas had any interest in his service, Thomas simply responded by saying “I would much rather have my nephew involved in providing the fiduciary advice.” At this point, John realized that he might miss out on a significant fiduciary account if he did not step forward, so he accepted his uncle’s agreement to serve him.
John planned time to review Thomas’ investments by type, size, and several other characteristics. He also recommended an attorney to draft pertinent papers to distribute the estate at Thomas’ passing to his wife Mary.
This example provides a clear picture that a close personal relationship a financial planner may have with someone like an uncle can represent a significant intellectual and emotional relationship. However, competing with close personal relationships is the challenge the financial planner faces as a fiduciary to also be able to provide useful and pertinent financial planning advice and recommendations. Over time, the stronger personal relationship the financial planner has with his uncle (in this example), the more likely this relationship may affect the professional relationship the financial planner desires to have with his client (Bearden 2001).
Solicitations from a Business Partner
Consider another situation in which a financial planner and his real estate partner jointly own a small strip mall. They have owned the property for about five years. Each partner had to secure additional life insurance to cover his part of the debt on the property, as the prior policies were about to expire. The financial planner purchased the needed coverage for himself to cover his part of the debt and protect his partner. The financial planner recommended that his real estate partner search for an insurance company that would underwrite the additional coverage needed.
In the process of the real estate partner’s search for insurance coverage, he revealed that he was declined for his coverage due to a physical condition that was diagnosed at the time of the underwriting. The real estate partner agreed to work with an insurance agent who was an expert with sub-standard carriers, to gain as competitive of a quote as possible. The real estate partner secured information from an expert agent for sub-standard carriers, and after a medical examination, qualified for a rate just below standard. This experience was viewed by both partners as a difficult matter, as their loan on the strip mall required life insurance for both partners. The second partner in the property paid his premium and both premiums were paid for five more years.
This type of experience also reflects why the financial planning partner did not seek to engage his real estate partner as a potential financial planning client. He was too involved with his partner in maintaining their office building. This experience also indicates that having a partner in the real estate business gave the planner less time to develop his practice as a fiduciary, and this certainly may also qualify as a conflict of interest. As both partners need the utility of the building, one partner could be active in the real estate business, while the financial planner could then focus on financial planning and fiduciary services.
Situations that May Not Pose a Conflict of Interest
Solicitation from a Church Member
A solicitation from a member of the financial planner’s church may well reflect the individual seeking the influence of honest investment advice, thinking that such a person would likely be honest regarding consideration of the right investments for the member’s existing financial assets. Such preliminary assumptions will enable the investment advice fiduciary to ask key questions and prepare pertinent investment recommendations that may enable the church member to utilize the investments in an appropriate manner for the church member’s retirement plans. This, of course, depends on a careful review of the church member’s assets at hand, as well as the future plans of the individual, so that the investment assets the financial planner would recommend are a good fit for the church member’s needs.
Assuming the church member is able to have an active discussion about his or her assets and desires for the future, the fiduciary may be able to make pertinent recommendations for the member’s needs. Given this assumption, as a secondary benefit, the positive experience of this church member may well lead to referrals to other members of this church who have an active interest in investing their assets in an appropriate manner for their retirement.
Hence, other persons in the church may benefit from the recommendations of the fiduciary. This may apply well not just to other members of the church, but to the growth of the church’s general assets as well. These assets may grow indirectly through tithing or other means.
However, if the fiduciary is not able to develop pertinent recommendations for the other church members, no recommendations would be made, and future interactions by other church members and the investment fiduciary and future interactions with other church members would be unlikely to occur.
Solicitations from An Unencumbered Prospective Client
An unencumbered prospective client is someone who needs the influence of a fiduciary but doesn’t have an existing relationship with that person. This means he or she needs a clear assessment provided by a fiduciary based upon the current investments of the prospective client, without a conflict of interest. Thus, this client may be willing to provide clear and candid information that is prudent and straightforward. The fiduciary in such a case would carefully avoid misleading statements about conflicts of interest, fees, and investments. In addition, unencumbered prospective clients may follow the policies and procedures provided by the fiduciary, which are designed to ensure that the advice given is in the prospective client’s best interest. The fiduciary will charge no more than is reasonable for his or her services and will provide investors with basic information about any conflicts of interest.
The Summary Point
We have traveled a lengthy and significant path through the explanation of the fiduciary and the important services she or he is able to provide. By focusing on the development of the fiduciary’s understanding and resulting skills, he or she should be able to contribute these valued skills to prospective investment clients, so they in turn may develop and be able to use their resources for investment purposes as needed.
As stated in the opening section, financial planning and fiduciary service is usually offered with good intention, without much awareness of the personal entanglements that can develop from individuals with whom the financial planner is involved, including family relationships, business relationships, and other areas of commonality. Asking a prospective client who is already involved in several ways with a financial planner to become engaged in a fiduciary relationship is asking the financial planner to become involved in a likely conflict of interest. The key is for the financial planner and the prospective client to understand the elements of their conflict (or conflicts) of interest early in the process, so an active engagement does not occur between the two parties, with the prospective client and a financial planner not involved in any conflicting way. Instead, the financial planner can provide financial planning services in an unencumbered manner with clients with whom she or he has no conflicts of interest.
An early recognition by the financial planner to avoid any conflict of interest involves seeking clients who need fiduciary service without other relationship entanglements. This will then clearly and directly serve both client and fiduciary to their mutual betterment. And some clients will simply need an investment product, which also provides a service as well. My hope is that all involved will then be well served (Bearden 2010).
In closing, an important point to remember as a fiduciary is the importance of regularly searching for prospective clients who need fiduciary services, so that you are constantly using and developing your skills and insights. In addition, the referrals that are likely to develop should provide a reasonable ratio of clients who have an interest in the services of a fiduciary. Good fortune to all who seek to learn from the examples above in working to develop your fiduciary skills, to the benefit of your clients and yourself (Bearden 2023).
References
Bearden, F. C. 2001. “Conflicts of Interest in Providing Financial Planning to Friends, Acquaintances and Relative.” Journal of Financial Counseling and Planning 12 (1): 27–31.
Bearden, F. C. 2010. The Subtle Interest: Conflicts of Interest in Financial Planning. iUniverse, Inc.: New York, and Bloomington.
Bearden, F. C. 2023. “Remedies to Avoid the Subtle Influence of Conflicts of Interest in Financial Planning.” Journal of Financial Planning 36 (4): 36–39.
Davis, M. 2001. “Introduction.” In Conflict of Interest in the Professions. Edited by M. Davis and Stark. Oxford, England: Oxford University Press: 3–19.
Vessenes, K. 1997, December. “Avoiding Lawsuits Based on Conflicts of Interest.” Journal of Financial Planning 10 (6): 22–24.
Click HERE to read this article in the DIGITAL EDITION.