If you have clients for whom you serve more than one member of their family, do you know these clients well enough to detect a conflict of interest? If you studied the Conduct and Practices Handbook course and all other materials available, would you be able to learn what to look for? Conflicts of interest between clients can take on an unlimited number of circumstances, and the keys are to never ignore the subtleties, be aware of the possibility that a conflict may have arisen, and engage in frank, open discussions with your clients.
Here’s an example: Mr. and Mrs. Lynch have been your clients for many years. They’re retirees in their late 60s and they’re in spending mode, as they’re both healthy and travelling. They each have their own investment accounts as well as a joint account. Most discussions and instructions are by email and telephone. Of course, you follow all your compliance obligations, getting all instructions required and all forms updated; however, you have not seen either one of them in person in more than two years. Is it possible that you may have missed something?
If you had seen Mr. Lynch in person, you would’ve noticed that he looks 15 years younger. He has lost weight, had plastic surgery, a hair transplant and is wearing more fashionable clothing. What’s up? Did he get a health scare and smarten up about taking care of himself? Is he looking for attention from Mrs. Lynch? Is Mr. Lynch just fighting the aging process? None of these situations would put you in a conflict interest scenario; however, if Mr. Lynch’s incentive for these changes was something that had a direct impact on his relationship with his wife, and their finances, that would put you in a conflict of interest situation.
In this case, you wouldn’t know Mr. Lynch was going through this metamorphosis because you haven’t seen him in person; accordingly, you couldn’t have known the necessity of making inquiries to determine any changes to essential facts that may have led to a conflict of interest. This would not likely come up in conversation with the clients over the phone.
As it’s always better to have regular in-person meetings with clients to fulfill your know-your-client obligations, how would you have handled this conversation if you had met with Mr. Lynch? You may think this is none of your business, but if the decisions this client is making about his or her health or money have changed, you need to know the impetus of the change. So, you need to ask.
Let’s say, however, that Mr. Lynch shares with you that he’s having extra-marital affairs and Mrs. Lynch doesn’t know. What now? Can you carry on as if nothing has happened and continue to serve both Mr. and Mrs. Lynch? You know something that can impact the clients’ financial situation directly that you’re unable to share with Mrs. Lynch. Thus, you would be in right smack dab in the middle of a conflict of interest.
You would need to call compliance or legal and take direction from them. You might be directed to have a conversation with Mr. Lynch and tell him that you are now in a conflict of interest and cannot continue to serve both Mr. and Mrs. Lynch. Either Mrs. Lynch needs to be told, or they both must find another advisor. You cannot carry on serving both of these clients knowing this secret, because marital breakdowns impact financial circumstances directly.
As a lawyer, when I am retained by more than one party — for example, a securities dealer and advisor being sued by a client — I have a clause expressly in the retainer agreement signed by both parties that all information provided by one party must be shared with the other party. If a conflict arises that cannot be resolved with full disclosure, both parties may be required to retain a new lawyer. I am not permitted to continue acting for both parties when I have a secret impacting the matter that I’m not permitted to share with my other client. So, the issue of a conflict of interest is the same for all professionals and can raise its ugly head at the most unexpected and inopportune moment.
If Mr. Lynch says that Mrs. Lynch knows, you will need to ask Mr. Lynch’s permission to meet with her to discuss whether she’s comfortable having you continue to advise both Mr. and Mrs. Lynch — if you think that is appropriate. (You would also have to check this with compliance.) It might be better to have one of them retain another advisor in your office to ensure their specific interests are being taken care of.
So, be sure that you know each of your clients, which means through in-person meetings. If you are serving more than one family member, be sure that you keep a sharp lookout for conflicts of interests and resolve these in the best interest of all clients involved.