Since modern compliance began in 1988, there has always been talk about the adviser’s need to “know your customer”.
This involves a review of the customer’s circumstances – personal and financial – hopes, aspirations, needs and typically an analysis of attitude to risk generally, in the area consulted on, for the specific transaction.
A neglected area where IFAs sometimes make serious mistakes concerns the precise identification of the client whose help is needed and of whom these various enquiries need to be made.
The Financial Ombudsman Service receives many complaints concerning powers of attorney – and the inability of banks to understand and apply them correctly.
Compliance practitioners have to mumble “conspiracy to defraud” every so often when an IFA ignores the interests and property rights of a vulnerable customer in favour of a family member with a power of attorney. Using such relatives’ money to place in an Isa in the attorney’s name may be simpler. It is actually stealing or helping someone to steal. Senile customers can invest through their attorneys but it must be in their interests to do so and investments paid for exclusively with their money must remain in their name alone.
Where a firm has the members of a family business as clients, things can become awkward. In one case, a sibling director sought advice on how to use some cash in the business. The IFA relied on his (imperfect) knowledge of his client without considering the firm’s attitude to risk.
This was particularly unfortunate since the person consulting him had indicated in writing that the company had a completely different attitude to risk (ultra-cautious with a need for continuous liquidity) to his own. Litigation followed, ending only with the firm going into default.
At a more mundane level, advisers constantly struggle with the extent to which other family members’ interests should be considered. The client agreement here should be a chance to clarify who is receiving the advice and so whose interests need to be primarily considered.
With the increasing complexity of formal relationships, the adviser needs to establish early on the extent to which a review of the family’s finances is appropriate, notably whether members wish to handle financial matters as a unit or separately. It may be paternalistic approaches of the past need revising but there remain relationships of dependency where advice must take this into account. Remember that in advising one member of the family in how to protect others, the adviser is meeting his client’s needs (typically emotional ones) rather than those of a client. And where recommendations are made to life partners, unless one authorises the other to act exclusively on his or her behalf, factfinding cannot be done without the involvement of the less dominant partner.
A joint investment must be suitable for all those who own it. In a recommended sale, a regulator or ombudsman will always assume all those who contribute or whose names appear on the investment were advised to take out the product. If the dominant client dies, the other person will end up owning the investment and it must be suitable for his or her requirements.
Problems caused by “Know who your client is” requirements can raise ethical issues. Holding exclusively a power of attorney which cannot be revoked while acting as a financial adviser creates obvious conflicts of interest. The client cannot sack the adviser in that situation so the adviser can only be an attorney if declining to act as an adviser or if a joint holder of a power of attorney can effectively fire the adviser from acting in that capacity.
Ethical conferences devote much time to discussions of how one advises couples where one reveals something that he or she does not want the other to know which is relevant to their financial planning.
The correct answer is usually to abandon both clients and tell them to seek advice from two separate financial advisers.
It is almost impossible to pull that manoeuvre off without revealing at least the existence, if not the content, of the secret.
Adam Samuel is an independent compliance consultant