If some of my clients insist on responding to the current recession by getting completely out of the markets, buying gold, or stuffing their mattresses with cash, what is my responsibility as their financial planner?
I recently participated in an online discussion of that issue with some professional peers. One of them raised an important question. How far should planners go to try to keep people from making what the planner views as a serious mistake? It’s important to respect someone’s competence and ability to make their own life decisions. On the other hand, should a planner stand idly by and watch someone walk off what the planner perceives as the edge of a financial cliff?
Part of the answer to this dilemma is to understand a planner’s legal obligation. This obligation depends on whether you are a client or a customer. If your planner is a fee-only independent planner, you are a client. If your planner works for a major investment bank, you are probably a customer, which means the planner has no obligation to put your interests first.
For planners who choose to put their client’s interest first, what are their legal responsibilities when, in the planner’s opinion, clients are about to do themselves financial harm?
Suppose I have a client who is about to do something that may be viewed by a court of law as “extreme” or “imprudent.” (An example would be putting all his money into one asset class like gold, cash, penny stocks, etc.) I would feel pulled from a position of liability to be certain I emphasized to the client that, given the research and data available, his actions could hurt him financially. I also would want to be sure the client fully understood and took responsibility for those actions.
As professionals, financial planners need to protect themselves by carefully fulfilling their legal responsibilities. During my career in real estate and appraising, I appeared in court many times—usually as an expert witness. I’ve learned that a lawsuit is the last way to settle a professional dispute. The best way to stay out of court is to be comprehensive and complete in actions, words, and documentation.
This brings us to the broader aspect of what financial planners owe to their clients. In my view, they first of all have an ethical responsibility to do no harm. They need to put the clients’ best interests first. They also need to educate themselves continually so the advice they give is as sound as they can make it.
Sometimes this ethical and legal responsibility requires planners to give clients information they may not want to hear. The planner needs to recognize and honor clients’ resourcefulness and opinions, and also recognize that in some cases they may not have all the facts or they are about to act based on delusional thinking or fear.
When clients are hovering on the edge of a financial cliff, planners don’t want to shame them or abandon them to their fears. The challenge is to help them pause long enough to reach a more rational place so they can gather additional information.
When I work with clients in this way, my experience has been that they are almost always able to get past the fear that is pushing them to make imprudent decisions. This is one reason I have such a commitment to working, not just with financial facts and figures, but also with clients’ beliefs and emotions about money. It is one of the most effective tools financial planners have to help protect clients from themselves.