A question of ethics in the client relationship

By PATRICK CAIRNS

In a recent article in the business press, two financial advisers were asked about their worst clients of 2019. In both cases, the advisers mentioned retirees who insisted on moving large parts of their portfolios into investments that were not part of their financial plan.

In the first instance, a 68-year old woman told her adviser that she wanted to give a third of her capital to an offshore outfit that claimed to be trading bitcoin. Her adviser urged her not to take this kind of risk and to stick to the strategy that they had agreed on together.

She was, however, unmoved, and so her adviser reluctantly agreed to give her the money. She was, after all, the client, he noted, and he had to act on her instructions.

In the second case, a recently retired man decided that he wanted to take his entire portfolio out of stocks and move it into the money market because he was worried about the outlook for equities. He would move back into shares, he told his adviser “at the right moment”.

The adviser recounted how he spent a great deal of time trying to persuade his client against this course of action. Yet the client found none of his arguments convincing, and insisted on moving the funds into the money market investment he had chosen.

The missing part of the story

It's almost certain that every financial adviser will encounter clients like this at some point in their careers. Inevitably some investors think that they know better.

In that respect at least, these stories are probably not that remarkable. It was however noteworthy that neither adviser suggested that they had considered parting with these clients as a result.

This raises an important question. If a client refuses an adviser's counsel, is it ethically appropriate for that adviser to keep that client's money on their books?

Seeing eye to eye

The first level on which this is relevant is that if the adviser's input is considered by the client to be worthless, then should the adviser still charge for it? Some might argue that the advice has been given, regardless of whether the client acted on it, and so it can be charged for. But does that argument hold true in the case of an ongoing fee?

Secondly, if an adviser and their client can't agree on a course of action, then has their relationship not become dysfunctional? You can't, for instance, imagine a doctor being willing to prescribe medication to a patient who has disagreed with their diagnosis and demanded something else. So if a client has rejected an adviser's input, should the adviser not feel obliged to end the relationship?

Of course it is difficult for an adviser to 'fire' a client. You can't just hand a client's funds back to them without at least satisfying yourself that they are secure. (This might have been possible in the second instance above, but certainly not the first.)

But is it ethical for an adviser to continue to charge a fee on money that is not really under their advice? Should an adviser even want to keep an association with a client that refuses to listen to them?

Principles

An adviser might argue that it's worth maintaining the relationship in the hope that the client can still be convinced to return to their financial plan. They might even feel that it's their responsibility to do so. An adviser might even argue that if they let the client go, there is a risk that they would not find anyone else willing to take them on, and be left without support.

However, a lawyer could not make the same argument. If a legal client rejects the advice they are given and insists on a course of action with which their lawyer fundamentally disagrees, ethics dictate that the lawyer should end the relationship. Legal ethics even note that because the relationship between the lawyer and client is based on trust, a breakdown of that relationship may be cause for the lawyer to withdraw from a case.

Unfortunately, the FCA's Code of Practice for Approved Persons (APER) doesn't contemplate this kind of scenario. In requiring approved persons to act with integrity, it focuses on not misleading clients and not misusing their money. It does not talk about maintaining the integrity of the relationship.

This is an ethical question that financial advisers should perhaps be taking more seriously. If your client rejects your advice, then are they really still your client? And if not, then should you still be handling their money?

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