Life is full of temptations. For financial advisors of various types, one of the most common is having clients who pressure you to break the rules in order to generate a better investment return, lower costs, or fewer penalties. Although most advisors know how to deflect such pressure, some may find it difficult, especially when a client generates substantial commissions or fees. But deflection is essential in order to avoid regulatory or legal problems and to preserve one’s ethical values. To these ends, ThinkAdvisor earlier this year published an article filled with excellent advice. Here’s a quick summary of tips that can help preserve your integrity.
- Know what’s at stake. Rules exist for a reason. If you allow a client to persuade you to break them, you may open yourself up to regulatory scrutiny or liability under criminal or civil law, according to Thomas Giachetti, J.D., a securities attorney at Stark & Stark in Lawrenceville, New Jersey.
- Draw a clear line between what you will and won’t do. If a client asks for something that either violates the law or forces you to abandon your ethical principles, firmly but respectfully decline, ideally in writing. Then recommend the person seek the advice of counsel.
- Be wary of clients pushing for participation in questionable investments. The lure of large returns may blind clients to common sense. If they pressure you to get them into a shady deal or one for which they’re not qualified, warn them not to get involved, again in writing. A good way to position this is to invoke the fiduciary standard (assuming you operate under it). Tell them you can’t go along with anything that isn’t in their best interests.
- Lack of knowledge isn’t a defense. If a client wants you to do something that falls into gray areas, ask for time to consult with an expert. Never proceed with any action whose legality or ethics is unknown.
- Look inside for ethical guidance. Don’t fall for the appeal that “everyone is doing it.” A lot of advisors were feeding clients into Bernie Madoff’s giant Ponzi machine simply because everyone was doing it. Look what happened to them and their clients.
- Don’t sidestep personal responsibility. If a client is bent on doing something wrong, many advisors assume someone else will intervene. The problem is, no one ever does. Ron Duska, former director of the American College’s Center for Ethics and now an independent ethics consultant, recommends advisors ask themselves four questions. First, is the client about to incur a preventable harm? Second, are you, the advisor, in a position to circumvent this harm? Third, are you in close enough proximity to the person to take action? And fourth, are you the only person in a reasonable position to intervene. In other words, no one else in your company has the authority and/or desire to act. If an advisor answers “yes” to all four questions, he or she should get involved to prevent wrongdoing.
- Be gentle in redirecting the client. Many times, people will request illegal or unethical actions out of ignorance, not criminal intent. In such cases, assume that the person doesn’t know the rules and educate them about the proper way to get things done.
- Trust your instincts. Even if a requested act isn’t clearly illegal or unethical, learn to trust your “gut” when it sets off alarms. When it does, advise the client that you need to conduct further research and/or consult with experts before getting further involved.
In short, most clients are perfectly reasonable and ethical and will follow your lead in order to comply with all relevant laws and regulations. But occasionally either through greed or ignorance, they will ask you to generate greater returns or lower costs by “finessing” the rules. In such cases, stand up for what you believe is right. In the short term, you may suffer some blow back from clients. But over the long term, they will understand why you refused their request and thank you for it. Your career will thank you, too. Good luck!
For information on affordable errors and omissions insurance for low-risk insurance, investment, and real estate professionals, visit EOforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.