Referrals are widely regarded as the most effective way to build your business. But not all referrals are a good thing.
For example, when a client refers a family member, such as a parent, there are many potential conflicts of interest that you need to consider before signing with the new client.
You may discover, for instance, that the parent has plans for his or her nest egg that conflict with the original client’s expectations. The child could be depending on inheriting those assets, while the parent has other ideas.
“You, as the advisor, can get caught in the middle,” says Bruce O’Toole, an associate with Crawley Meredith Brush LLP in Toronto, who spoke at Financial Planning Week events in Toronto this month. “You [may have] received information from one client that is completely at odds with the other,”
Here are a few ways to avoid potential conflicts of interest with family referrals:
> Talk it out
Discuss with both the client and his or her parent, either as a group or individually, possible conflicts that may come up and how you will address those issues.
Inform the client and the prospect up-front that they cannot expect complete confidentiality if you will have to tell each of them of potential changes that will affect their respective financial plans, says O’Toole.
“Your obligation is to give both [clients] the best advice you can,” O’Toole says. “And so, long as you’re letting everyone know what’s going on, you’re not in trouble with the rules. You’re being ethical, you’re doing what you agreed to do.”
Put it in writing
Write an agreement that sets out your role with the two clients. Clarify what will happen if conflicts between the two accounts should become unmanageable.
Include an explanation in the initial client agreement that specifies which client you will continue to work with, and who will have to find another advisor, should a dispute arise, O’Toole says.
Even after you have discussed various scenarios with the client and the referral, there will always issues you’re not prepared for. When something unexpected arises – tread carefully.
Most complaints against advisors arise as a result the advisors failing to think a situation through and take the required steps, says Leona Tranter, director of standards enforcement with the Financial Planning Standards Council in Toronto. Be sure to document transactions and communications with clients.
> Suggest an alternate
If you suspect an unworkable conflict of interest could arise, don’t be afraid to turn the referral down.
While it seems counter-intuitive, sometimes the best thing to do for your business is to suggest another advisor you know and trust for the client’s parent, Tranter says.
Tomorrow: Tips for getting more referrals
IE