The unethical client

21 Mar 2022

From AdviserVoice - This Ethics article is proudly brought to you by GSFM

Dealing with client ethical dilemmas can be challenging.

The industry media regularly publishes stories in which an absence of ethical behaviour is apparent. However, about those situations where a financial adviser is instructed by a client, but cannot act on that instruction without breaching an ethical standard? This article, proudly sponsored by GSFM, will examine this issue in line with the Code of Ethics.

If you stop and think about it, would you consider yourself to be ethical? Most reading this article would, correctly, answer yes. However, it’s important to note that different value systems mean that one person’s moral code – and their concept of ethics – is not necessarily aligned to another’s. While most people will be ethical most of the time, what happens when a client asks for something that’s not quite within your ethical boundaries?

Since 2019, financial advisers have had an ethical framework within which to work, with five values and twelve standards, which came into law on 1 January 2020. And while you may understand the framework and understand its importance when providing financial advice, your clients may think differently.

It’s not unusual for advisers to encounter ethical dilemmas when working with clients. Each person has a different values system and it’s important to try and understand your clients’ attitudes and beliefs. While having aligned values and beliefs is not a prerequisite of working with a specific client; however, how you deal with ethical dilemmas is important. No adviser wants to face enforcement action by ASIC for breaching the Code of Ethics (the Code).

The standards that comprise the Code (figure one) are not intended to provide definitive guidance. In practice, individual circumstances will differ, and the Code allows for differences of professional opinion on how the ethical rules of the profession apply in individual cases. Ultimately:

“Doing what is right will depend on the particular circumstances and requires you to exercise your professional judgement in the best interests of each of your clients.”

Client directed unethical behaviour

Ethics can be defined as:

‘Moral principles that govern a person’s behaviour or the conducting of an activity’

In financial advice, it can be distilled into acting in the client’s best interests at all times, acting with competence, honesty, integrity and fairness. In short, the way any one of us would like ourselves and our family members and friends to be treated by any professional service provider.

The unethical client will generally reveal themselves to you by what they say. While some unethical clients may be quite direct, others may take a more subtle approach, such as talking in hypotheticals.

For example: “I have some information that will impact ABC Limited that I’d like to make use of”

Versus: “If I was to come into information that would impact a company’s share price, could we use that to add value to my portfolio?”.

If a client asked you to do something unethical, which might also be illegal, you may face one of the most challenging dilemmas of your career. This can be an extremely difficult situation, one which could have serious consequences for both individual advisers and their licensees (and potentially, other advisers working under that licence). Some actions can also have consequences for the client. Repercussions of acting on an unethical client request might include:

a breach of one or more ethical standards
a breach of the law
losing your right to practice, your reputation and credibility – and, if independently licenced, your AFSL
the potential for your licensee to lose their AFSL
the risk of being charged, incurring a fine and/or imprisonment.

Such repercussions won’t necessary be limited to you – they can impact:

your colleagues, who may need to find a new licensee and whose reputations may be damaged by your actions
your family, as they lose an income and have to deal with the added impact of financial penalties and potential incarceration
your other clients, who will need to transition to a new financial adviser/licensee.

How to respond to a client’s unethical directive

Not everything is black and white – it’s in the many shades of grey that difficulties might arise.

Some client directives may immediately ring alarm bells. The director of the ASX-listed company wanting to set up a managed account in another name so he can trade the shares of his company and affiliates should immediately raise suspicions. Other directives may not be so obvious.

If you’re faced with an ethical dilemma, emotion can take over as these situations may feel overwhelming. The following ‘do’s and don’ts’ are based on insights from Amy Gallo of the Harvard Business Review^[1]:

Do:

question your assumptions because fear of confrontation or retaliation can result in rationalising an action you know isn’t right
gain perspective and try to understand what is motivating the request; this can help form a response, particularly when there’s an ethical way to achieve the same goal.
have a conversation: With the exception of extreme ethics violations, confronting the individual directly first is often the best way to manage a situation. Provide an opportunity for the person to explain his or her actions or to correct the behaviour first. If a direct conversation doesn’t resolve the issue, you may need to inform your manager, HR department or a company ethics hotline.

Don’t:

forge ahead without a plan – a planned approach is important to adequately address the situation
fake accusations, rather maintain a focus on understanding both the situation and the request.

It is critical that you maintain your ethical awareness, particularly in the context of the twelve standards that comprise your Code of Ethics. It is also important to practice sound judgment as you decide what steps to take in dealing with ethical dilemmas.

The following five steps can help you to make better-informed decisions that align with your values and enable you to provide an ethical example to the other members of your team. When all members are aligned with respect to ethics and values, your practice will be more effective and ethical.

1. Clarify the client’s request

Make sure you understand exactly what the client is asking you to do. What is their desired outcome from this action? How exactly do they want this to play out and what is their role?

Examining the client’s intent with probing questions is sometimes enough for a client to recognise they have asked you to do something unethical. Some clients may ask you to do something unethical because they don’t know better. Others may know all too well what they’re asking and may be less than honest; it is a good habit to ask probing questions and take detailed notes.

Use questions such as “Can you help me understand?” or “Can you see an issue with that approach?” can help establish whether your client is open to a productive discussion.

2. Reaffirm their request

Once you are clear on what they are asking you to do, why and to what end – and if there’s no sign the client sees anything wrong with the request, summarise and clearly repeat it back to the client. You need to have a strong and immediate response when a client hints at unethical behaviour.

However, there may times you are blindsided by a request and need some time to consider the issues and formulate an appropriate response. In such a case, it’s best to advise the client that you’ll need to defer the discussion.

When you’re ready, present a succinct statement of fact to the client.

“You are asking me to do X and Y, because of Z with the goal of A, B and C”.

By articulating it out loud, in clear and concise terms, the client may realise what they have asked you to do is not ethical and reconsider.

3. Consider the big picture

You’re clear on what the client has asked you to do, the client is clear that you understand what they want to do, but the client has not had a ‘light bulb’ moment and recognised they have put you a position that could range from difficult through to untenable.

Note down the issues you have with their directive:

How does it sit within your personal ethical code as well as the code and standards you’re obliged to follow?
Consider each of the twelve ethical standards and how actioning your client’s request might beach them.
Give thought to the Corporations Law and any potential breaches of that too.
How might this impact your licensee, colleagues and family – and how might it reflect on the broader advice profession?

4. Articulate your concerns to your client

Such a scenario presents a tricky situation. You want to do the best for your clients and help them achieve their financial objectives.

However, where a request is antithetical to the principles and standards you’re obliged to uphold, and in conflict with your personal moral code and values, you need to clearly articulate those issues to your client.

Your conversation could cover:

how what he or she has asked you to do would mean contravening your personal ethical and moral boundaries
how what he or she has asked you to do would mean contravening the Code of Ethics and legal boundaries of your profession
the potential ramifications for both of you in terms of reputation, job loss, the broader ripple effects on family and others.
the potential ramifications for the client; some unethical actions that are also illegal can also result in significant penalties for them.

Importantly, you want to feel comfortable that you can live with your actions, even if it means losing a client.

5. Offer an alternative solution

At this point it’s important to keep your cool; being faced with an ethical dilemma can see emotion take front seat.

If you can find an alternative that does not result in you having to compromise your ethical principles or the Code of Ethics that underpins financial advice, explain that to your client as tactfully as you can.

Let your client know that you’re uncomfortable with the request by articulating your concerns (step four), but if possible, offer an alternative solution. If your alternative approach is rejected – or there is no alternative approach – the best thing for you and your practice is to walk away.

Importantly, if you do decide not to have any further dealings with the client, you need to offboard them and be sure to keep a detailed file note, lest they return, or some issue arises.

The next section of this article will examine several ethical dilemmas – plus a case study for each – where an adviser may be asked by a client to behave in a way that would see them in breach of FASEA’s ethical standards.

Ethical dilemma – a desire for financial gain

Most of your clients will have objectives and aspirations around building wealth.

How do you deal with those who have discovered a ‘get rich quick’ scheme or come into information they want you to act upon?

The get rich quick scheme is often easier to deal with; a quick reminder that ‘if it seems too good to be true, it probably is’ should be given. However, the number of Australians falling prey to financial scams on the promise of a quick buck continues to rise every year – in fact, Australians lose more money to investment scams than any other type of scam.

Cryptocurrency scams are on the rise and promise great riches. Media coverage of the money to be made (and lost) by investing in crypto could encourage investors to dabble, only to fall prey to a scam. According to the ACCC’s Scamwatch website^[2] it’s difficult to identify legitimate cryptocurrency investments from scams. Scammers take advantage of the hype and the less regulated environment to ‘invest’ in Bitcoin or another cryptocurrency on the client’s behalf – and of course, disappear with their money.

Of course there are other investment scams to watch out for – boiler rooms still operate in many countries, targeting Australians, as well as other unsolicited contacts. While protecting your clients from scammers is not necessarily part of your role, once you know about an intent to act, you should do everything you can to demonstrate to your client it’s not in their best interests. This way, you have likely met your obligations, even if they don’t heed your advice.

The harder of the two scenarios is dealing with market sensitive information.

Your client has information. It might be about a listed company he or she works for, or a related entity. It might come from a contact who is in a position to learn market sensitive information.

Perhaps a smaller listed company has won a major contract or maybe it’s the subject of an acquisition. Conversely, a company may have a major lawsuit brewing or a significant product failure, something that’s likely to push its share price down. The client shares this information and wants to act on it, although it is something you didn’t need or want to know. This creates a dilemma. Does your duty to provide client confidentiality override your duty to report wrongdoing?

It may or may not be valid information, but to act on it could be in contravention of the Corporations Act 2001 – Sect 1043A (insider trading), as well as several ethical standards.

Case study one: Failing the due diligence

Margot is a couple of years out of university and working in an inner city practice targeting people like her; cashed up millennials. The lead adviser encourages the team to seek out interesting investments, the sort that might appeal to their target market. The team is strong on ESG, impact investments and a range of ETFs, from the more vanilla index based offerings through to the more esoteric.

A few of her clients had asked about cryptocurrency so Margot set out to scope investment opportunities for her clients. One client introduced her to an online service through which clients could buy cryptocurrency. He claimed to have a personal involvement with the business. The service could trade on the clients’ behalf and provided a custom app through which the investments could be monitored. The client was eager for Margot and her colleagues to use the service.

Rather than discuss this with her colleagues, Margot decided this was an opportunity worth offering to a handful of her favourite clients. She also invested herself. She thought that once she was experienced with the app and more confident with the asset class, she’d share the idea with her colleagues and invite more clients to participate. This was not something on her licensee’s approved product list.

Unfortunately, after several months of seemingly normal trading, the platform – and invested money – disappeared. The client who introduced the concept also disappeared; it appeared he had used a fake address, his phone and email were disconnected. Margot had fallen for a sophisticated cryptocurrency scam and by recommending that scam to her clients, they lost money ranging from $50,000 through to $250,000. Two of her clients had invested money they were saving for a home deposit, something they – and Margot – thought could be accelerated more quickly using cryptocurrency.

While this was not a deliberate ruse by Margot to make money, she failed to undertake adequate due diligence and operated outside of the parameters of the AFSL under which she worked. As a result, she cost several of her clients a substantial amount of money and potentially breached the following standards in the Code of Ethics.

Case study two: Insider trading

David is the Chief Operations Officer of PPP Limited, a large, listed company operating in the financial sector. It had experienced mixed success for a number of years and rumours of acquisitions and divestments had swirled around it for some time.

David had largely looked after his own financial matters, especially when it came to share trading. However, he decided to seek some advice and, on recommendation from a colleague, consulted Andrew from AAA Financial Advice.

When the two met for the first time, Andrew ascertained that David essentially wanted to establish a managed account in his brother in law’s name, that he operated but were both beneficiaries of. As this is not a standard request, Andrew quizzed David closely. It transpired that he wanted to take advantage of some significant corporate events likely to impact PPP Limited over the coming two to three years. He’d convinced his brother in law it was a sure thing and as both were quickly approaching retirement age, it seemed a good way to top up their retirement savings. As an incentive, David offered to share the information with Andrew, so he too could benefit.

Andrew has three choices.

to explain that what David has suggested constitutes insider trading and to what he has requested would see all parties in contravention of the law, and Andrew in breach of the Code of Ethics, or
to establish the managed account as requested but take no further action
to establish the managed account as requested and take advantage of the information himself.

Breaches of FASEA’s code of ethics

Andrew chose option one and told David he could not help him. Had he chosen the other options, he would have potentially breached the Corporations Act 2001 – Sect 1043A and potentially violated the following standards in the Code of Ethics.

Ethical dilemma – elder abuse

It is estimated that between 2% and 14% of older Australians experience elder abuse in any given year, with financial abuse appearing to be the most common form of abuse experienced by elderly people^[2].

The Financial Services Council (FSC) defines elder financial abuse as:

Any activity by an individual that seeks to use fraudulent, illegal, deceptive or otherwise improper acts or processes to advantage from the financial resources of an older or elderly individual. Advantage can include personal profit or gain, enabling profit or gain for a relative, friend, spouse or business associate, or deprivation of the right of an older or elderly individual to access benefits, resources, belongings or assets for any reason.

The definition includes acts perpetrated by people known to and trusted by the victim, as well as acts committed by strangers and by institutions. The elderly are especially vulnerable to financial abuse. Research has repeatedly shown family and carers on whom the victim depends for social contact and daily care are the most likely perpetrators of financial elder abuse.

AFCA describes improper conduct in relation to financial abuse as:

an abuse of trust, where a trusted third party persuades the elderly person to act in a way contrary to their interests
conduct resulting in personal gain for a third party in a formal position of trust giving rise to fiduciary duties, such as the holder of a Power or Attorney (POA).

Illegal or improper use of an older person’s funds or resources might include:

mismanagement of their funds or investments
theft of money or possessions
taking control of their finances without permission
taking control of their finances with permission but misusing the funds
pressuring relatives for early inheritances
pressuring the older person to accept lower-cost or lower-quality services, such as aged care, to preserve more financial resources to be available as an inheritance
carrying out unnecessary work or overcharging for services
living with the older person and refusing to contribute money for expenses
forging or forcing an older person’s signature
promising long-term care in exchange for money or property and not providing the promised care
convincing an older person to be a guarantor for a loan or business where the benefit of the loan is for someone else
persuading the older person to change the terms of an existing contract, the clauses in a Will or a POA through deception or undue influence
convincing the older person to sign over the title/s of property they own.

Although POAs are often used to protect older people, particularly those experiencing cognitive declines, cases of financial elder abuse have included the misuse of control using an POA.

Case study three: abusing a POA

The complainant, Pamela is 85 years old and received financial advisory services from ABC Financial Planning. These were provided by its authorised representative, Frank who, as well as being an authorised representative, is Pamela’s son in law. Therefore Frank had both a personal relationship and a professional relationship with Pamela. Her daughter, and Frank’s wife, Trudy holds a Power of Attorney to manage her mother’s financial affairs.

In making a complaint to AFCA, Pamela says Frank took advantage of his position of trust as her adviser and induced her to lend money to him and his family on various occasions over a five year period. Trudy, as Power of Attorney, went along with his plans. Pamela claims these loans have not been repaid.

Frank says that all but one of the transactions were gifts, which Pamela tried to re-characterise as loans following his separation from her daughter. He tried to make a case that because of her age, she had ‘forgotten’ the nature of the transactions.

AFCA found that ABC Financial Planning was responsible for Frank’s conduct given his status as an authorised representative. He provided financial advisory services to the complainant during the relevant period on its behalf.

Both ABC Financial Planning and Frank failed to adequately identify or manage the clear conflict caused by the adviser’s personal and professional relationship with the complainant. This allowed Frank to place his direct and indirect personal interests ahead of Pamela’s interests, in clear breach of his duty of care to her.

AFCA also found that Frank breached his duty of care and his professional obligations to Pamela by failing to place her interests before his own, by using her confidential information without authority and by misusing his position as a trusted adviser. This was compounded when he failed to keep promises to repay moneys when due. Further, it was found that the failure to adequately manage the conflicts of interest and other breaches of the duty of care owed to the complainant caused her to suffer loss.

AFCA’s determination was that ABC Financial Planning, as licensee, had to pay the complainant $110,728.38.

Breaches of Code of Ethics

Frank and ABC Financial Planning failed their elderly client by not adequately managing conflicts of interest or meeting the obligation to act efficiently, honestly and fairly in the provision of financial services. As such, the following standards of the Code of Ethics were potentially breached.

Financial advisers are required to act ethically and in the best interests of their clients at all times; after all, they make decisions and recommendations every day that impact the lives of their clients, now and into the future. Ethics in financial advice is an integral part of a complex system. It involves regulation, education, professional bodies and the integrity of each and every financial adviser and licensee working in the industry.

In the event of an improper request from a client or prospect, two things will serve you well. Firstly, it’s important to always present a professional image, one that reflects your integrity and your personal and company’s values. Secondly, respond clearly and confidently to improper or unethical requests by saying no.

Dealing with ethical dilemmas can be challenging. Talk to your peers, your practice manager or your licensee. Maintain your own ethical awareness and practice sound judgment as you decide what steps to take.