Among the most rewarding experiences that you have as an advisor is developing relationships with your clients and their families. As you help your clients pursue their investment-related goals and objectives, interesting and/or challenging scenarios are bound to arise. These may include issues surrounding aging clients, significant life events, and changes in marital relationships, just to name a few.
Let’s look at a few of these scenarios and review some guidance that can assist you in navigating client relationships—as well as considerations when conducting business with your own family.
1) Generational Wealth Transfer
Understanding your clients’ wishes regarding the transfer of wealth after death—and helping ensure that their intentions are carried out through careful documentation—is an important part of planning. It can also avoid a host of difficulties when clients pass away.
One potential issue is if a beneficiary files a complaint concerning your management of a deceased client’s account. There are a few approaches you can take to help avoid such an action:
- Review beneficiary/transfer on death status. Client meetings are an ideal time to review the beneficiaries named on a client’s accounts—whether listed on the client’s IRA or as beneficiaries in the registration of a transfer on death account. This will confirm that the client’s instructions are current, given that a client's beneficiaries may change over the course of time.
- Suggest including family members in client meetings. This can be an effective tool as your clients age, as well as in discussions of a new investment or strategy or if there is a change to a client’s wealth transfer plans. Inviting at least one of the client’s beneficiaries to the review meeting can help ensure that your client fully understands and is on board with your recommendations—and that the next generation understands and agrees with your approach as well. It's important to note that while the client can provide consent for you to share account information with a trusted source, if he or she wishes to authorize that person to act on the account (transaction and money movement requests), you must follow your firm's and/or the sponsor company's procedures to appoint the third party to the account. Most firms require specific authorization paperwork in addition to the required legal document(s).
In addition, as your clients age, be sure to pay attention to any significant changes in their families’ dynamics, and be on the lookout for red flags. Has your client changed beneficiaries from his or her children to an unknown third party or entity? This could be an indication of diminished capacity or potentially a sign of elder abuse.
2) Sales to Seniors
Over the past decade, millions of baby boomers have retired. In turn, regulators have increasingly focused on sales of securities to seniors, especially as they pertain to diminished mental capacity. To help protect yourself and your firm, stay alert to any changes in behavior that could indicate a client’s diminished capacity, including memory loss, unusually poor judgment, and disorientation.
To help avoid issues regarding a client’s financial situation should he or she at some point exhibit signs of memory loss or dementia, ask him or her to name someone who can be trusted when it comes to handling the client’s accounts held with you.
Divorce can significantly affect how you work with clients. Beyond the client relationship itself, you and your staff should be acutely aware of the constraints to which you must adhere once divorce proceedings are in the works. When your office learns that a couple is divorcing, review any standing instructions (e.g., trade authorizations, standing letters of authorization) to determine whether they are still in good order, need to be updated, or should be canceled.
Perhaps most important, you need to be cautious about which client account information (e.g., balances, transactions) may be provided to either party. This includes ensuring that your staff doesn’t share information if one party requests account information and is not registered as the account owner or listed as an authorized person on the account (e.g., an IRA can be acted on only by the individual owner). If joint account holders provide you with conflicting information, contact all parties to discuss a plan for moving forward. If clients aren't able to come to an agreement regarding joint account instructions, contact your firm's Compliance department to determine next steps, such as assisting you with understanding the allowances of the account agreement or potentially placing restrictions on the account.
4) Long-Term Client Relationships
The longer you work with a client, the closer you may become. As such, you may receive invitations to the client’s personal or business events or family referrals. Regardless of the nature of your relationship, it’s important to remember that you need to comply with industry best practices, including:
- Document, document, document. All recommendations, for all clients, to buy, hold, or sell a security or strategy should be documented, as should your advisory meetings. Documentation allows for both parties to be on the same page and provides the history and basis for decisions made.
- Gifting policies. Ensure that you follow your firm's procedures related to the receipt and giving of gifts to clients to prevent running into unintended conflicts of interest or policy violations.
- Provide appropriate disclosure documents. Even if a client declares that you don’t have to provide him or her with a copy of an appropriate disclosure document (e.g., a prospectus for a new mutual fund in a nondiscretionary account or a copy of your Form ADV), you are obligated to ensure that such documents are delivered.
- Use your official business e-mail account for certain communications. If a client turns a friendly back-and-forth exchange into a conversation about his or her investment accounts, be sure that the communication is sent through your business's e-mail account. Should the client send a security-related question to your personal account, be sure to forward the communication to your business e-mail account and then respond to your client from there. In addition, remind your client that all security-related communications must be sent to your business account going forward. This requirement is in place due to regulatory obligations that require firms to retain and supervise all business-related communications.
5) Your Own Family
There are numerous requirements that must be followed when dealing with your own family. Although it can be difficult, you should treat clients who are also family members in the same way as you treat other clients. The information discussed above is applicable, but you’ll also want to be aware of the following:
- Sales charge waivers. It’s important to ensure that even if a client is an immediate family member, you apply all applicable sales charge waivers. The type of customer that qualifies for a sales charge waiver is defined within the product's prospectus and can vary among sponsors and even among those sold by a single sponsor.
- Control relationships for family members. When you, or a staff member holding a FINRA registration, intends to act in a control capacity (e.g., as a trustee, executor, guardian, personal representative, power of attorney) for an immediate family member, ensure that you are complying with the applicable rules and your firm's policies regarding the potential reporting of outside business activities and personal securities holdings.
- Documentation. As previously noted, will all client relationships, including those with family members, be sure to follow your firm's policies and ensure proper documentation.
By taking the key actions outlined here, you will help protect your business—and your client relationships—against unforeseen risks.
What other issues have you seen as you develop long-term client relationships? Please share your thoughts with us below.