Welcome to the first of a 3-part CPD mini-series from AdviserVoice’s Ray Griffin. In this series Ray focuses on professional ethics and how, in day-to-day practice, you might deal with ethical issues that arise. At some point – Ray claims – an adviser will be placed in a situation where she will face a dilemma of ethical proportions that will conflict with commercial imperatives and professionalism.
(Click here to see CPD: Professional Ethics #2 and here for CPD: Professional Ethics #3)
The series is Case Study based on blends of real situations as recounted by advisers.
James and Sarah have been your clients for several years now and came to you seeking advice and ongoing management of their SMSF investment portfolio.
While you have provided them with several Statements of Advice to apply a portion of their sizeable cash holding within the fund to investments from your Approved Products List, to this point they have failed to implement all of your recommendations.
Your firm is being paid more than $5,000 in fees per year in accordance with the agreement however there is little evidence – in terms of asset allocation – that correlates your advice to the portfolio structure. There are several real property assets along with unit trust holdings within the fund all of which you have had no input to in terms of their appropriateness for the clients’ objectives.
When the dilemma first became more prominent in your thinking, you phoned the clients and explained that you are not really comfortable with the situation – that you feel as though you’re being overpaid. The clients remarked: “No that’s fine – we’re happy with what you’re doing.”
However, with increasing unease, you remain concerned about the situation. Since that discussion, on several occasions, you have explained to the clients that they are effectively paying you to manage cash and suggested they are not getting true value for money. However, the clients continue to insist they are happy with the current situation and don’t wish to change it.
To compound the situation, the clients have now moved overseas for several years and you are now required to deal with their Power of Attorney who is Sarah’s nephew, David. The clients have requested that all correspondence be addressed to them care of David who – they have said – will act for both of them if required.
Commercial issues
Backgrounding the situation is that you and your business partner have become increasingly concerned about overall revenue for your business. There has been an above average level of client attrition with the subsequent revenue consequences.
With difficult market conditions persisting, client retention has become the main focus for the business and you are implementing a program to ensure client service delivery and client retention. This is a 180-degree turn-around from the major focus of increasing client numbers that emerged from your annual strategic planning retreat with your business partner and staff.
Following the retreat a plan was implemented to better utilise the new client potential that sits within the network of family and friends of existing clients.
To this end James and Sarah have a strong circle of influence among their family and friends. You sense that in time this might lead to some of these people seeking advice from you and this would be good for the business. You could choose to retain them as clients and thereby retain the opportunity to have some of their friends/family members become clients.
An inheritance?
In your last review meeting with the clients, Sarah explained that her elderly mother was quite unwell with Parkinson’s Disease and likely has just a few years to live. Sarah went on to explain that she, as the sole beneficiary of her mother’s estate, is likely to inherit several million dollars in due course.
Sarah went on to remark: “… and when that happens we’ll get you to manage that money too.”
Risk to your business?
While you are concerned about the ethical elements that are embedded in this situation, you also recognise the inherent risks to your business in continuing under the current arrangements with the clients. These risks centre on, for example, potential litigation that might arise if the clients were to claim you should have advised them not to invest in a particular asset(s).
You are conscious of the many and varied costs associated with an action by an aggrieved client including damages, if found to be negligent; time costs from dealing with the claim; stress and anxiety of the process even if you are not found to have been negligent. Regardless of the outcome of such claim, you also know there could be damage to your professional reputation in your community and there could be an impact on all employees of your firm.
Turn a ‘blind eye’?
You explain your dilemma to your business partner and point out the difficulty in meeting all stakeholders’ priorities. The clients want to keep paying fees at the current level; the firm focus is on client (and fee) retention and you want to do the right thing by all parties. Your business partner argues that you should ‘turn a blind eye’ and act on the clients’ instructions – after all, they did say they are happy and don’t want to change the current situation.
Some options
You have reached the conclusion that there is no perfect outcome in the situation, given the clients’ determination to buy and sell assets as they wish. So you think about what your options are and justify them as follows:
- Keep accepting the fees and stay entirely with the current situation – after all, there is the push from management to retain clients.
- Terminate the agreement now without further discussion with the clients – this will fail the ‘client retention’ test but will reduce litigation risk to you and your business partner.
- Seek to re-arrange the service agreement with the clients to better reflect the services being utilised. However, this will result in reduced fee income for your firm.
So the key points are…
- The clients are not following your advice
- The SMSF has assets on which you have not advised the clients
- Your firm is being paid $5,000 + per year for professional services
- You and your business partner are heavily focused on client retention and service delivery resultant of the current above average level of client attrition
- Unless her mother changes her Will, Sarah is to receive more than $2 million inheritance when her mother dies
- David and Sarah have a strong circle of influence which in time should result in new clients for your firm
- You have been requested to deal with an, as yet, unseen nephew for all matters
- You are meeting all the agreed service obligations – eg meetings, reports etc – whenever the clients will allow you to
- The clients seem very happy to keep paying the fees
The primary dilemma
There are several issues at play here – not just the $5,000 per year in fees this year and beyond but also the prospect of acquiring new clients via the clients’ spheres of influence along with the prospect of a large inheritance for Sarah. Added to these aspects is the potential risk to your firm from the clients or, indeed, their estate if they were to die.
However, the primary ethical dilemma facing you right now is: Should you go on collecting more than $5,000 per year in fees for managing and reporting on cash?
or
Should you forego the fees and terminate/modify the service agreement with the clients?
Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes.
