Recent legal matters have demonstrated the need for financial services firms to create codes of conduct to address romantic relationships between advisors and their clients.
A recent string of legal filings has underscored the ethical and financial problems that can emerge when financial advisors become romantically or sexually involved with their clients.
One investor, in an arbitration filing late last month, accused her financial advisor of restricting access to her account’s funds unless she maintained a sexual relationship with him, and plaintiffs in recent lawsuits allegethat advisors in such relationships have interfered with divorce settlements and trust funds.
The American Bar Association and the American Psychological Association, in their rules of conduct, forbidtheir members from pursuing romantic relationships with clients, but the financial services industry does not have an equivalent standard. Securities-industry lawyers say the industry and its regulators need to do more to prevent these relationships from affecting customers’ finances, but that enforcement may be difficult.
The ABA and APA established their guidelines in recognition of the fact that lawyers and psychologists oftentimes must delve deeply into clients’ personal circumstances at a time when those clients may be in a traumatic and vulnerable state. Financial advisors sometimes venture across the same terrain with clients.
“Everyone realistically looks at their financial advisor the same way they look at their doctor and their lawyer, as a trusted person,” attorney Sam Edwards, whose Houston-based firm represents investors in securities-industry claims, told FA-IQ.
“Many conditions that contribute to a healthy alliance between a health professional and a client also exist between a finance professional and their client,” Dr. Janine Hayward, a chartered clinical psychologist and the director of London-based ComposurePsychology, told FA-IQ via email.
Hayward said that when a client places trust in a professional and shares information, feelings and hopes, theymay feel seen, heard, understood and experience validation, leading to a strengthened connection with the professional.
“We tend to engage with people we like and feel safe with, so a growing bond is likely to make a person more attractive and lead a client to believing the professional has their interests at heart,” Hayward said.
Meanwhile, the professional’s empathy and understanding of the client can enhance any natural attraction onthe part of the client, according to Hayward.
“Similarly to non-professional engagement, when a professional feels useful, respected and appreciated by aclient this can contribute to increased attractiveness,” Hayward said.
Hayward noted that other industries, such as health care, recognize these issues and have adopted guidelines for bidding their professionals from abusing a position of trust. But the brokerage industry has historically allowed a culture that at least looks the other way at misbehavior and at its extreme espouses misconduct, Edwards said.
“Fundamentally, Wall Street rewards you for getting … close to breaking the rule. The whole goal basically, is get as close to the edge as you can possibly get without going over,” he said, adding that the line then becomes easier to cross.
Hayward said the industry needs a clear set of guidelines defining professional conduct and ethical behavior, beginning with “the core principle of avoiding harm.”
The finance industry’s existing guidelines in this regard are broad and nonspecific.
The Financial Industry Regulatory Authority has its rule 3110, which requiresadequate supervision of brokers, and rule 2010, which generally requires “high standards of commercial honor.”
Registered investment advisors are bound by the fiduciary standard, and brokers are required to act in their customers’ best interest, but those rules were created with investment management in mind and do not directly address conflicts that could emerge when an advisor or broker becomes romantically involved with a client.
Moreover, those rules may not even be effective in seeking discipline or recourse against an advisor or broker who is accused of mishandling the finances of a client with whom they’d become personally involved.
There is no conflict or breach of fiduciary duty unless the client can prove that the advisor or broker asserted undue influence on the customer, according to attorney Jenice Malecki, whose New York–based firm represents both investors and securities-industry firms.
The customer would also have to prove damages, added Studio City, California–based attorney David Harrison,who is representing the investor in the arbitration claim filed last month.
Meanwhile, any such rule or guideline for handling personal relationships would be difficult to enforce, according to attorneys.
Edwards noted that advisors could easily move the client’s account to a partner advisor to create the appearance of avoiding conflict while still maintaining some degree of oversight. And Malecki pointed out that an advisor in an intimate relationship with a client could continue to provide financial advice and guidance inprivate conversations outside of the firm’s communication channels and supervision.
A more practical approach to the problem could be instituted at the firm level. Edwards suggested that firms, at the minimum, should have a policy requiring disclosure of romantic relationships with clients.
Harrison added that the disclosure could be part of an annual attestation signed after a firm-administered training moduleaddressing the importance of maintaining boundaries in client relationships.
Harrison also suggested that firms can be more proactive in notifying customers of their right to have their meetings with advisors in a conspicuous location on company premises and urging customers to report any instance of an advisor crossing the boundaries of professional behavior.
FA-IQ asked seven wirehouses and broker-dealers about their rules and policies in this area. One firm, whose spokesperson responded on the condition of not identifying the firm, said it has rules that address codes of conduct and personal relationships that place undue influence on a client, but that it does not presently have arule that specifically addresses or forbids romantic relationships between advisors and clients. The other firms did not respond.
Absent clear guidelines from firms, advisors need to acknowledge when feelings of attraction develop in a relationship with a client and proceed with professionalism, according to Hayward.
“It is ethically important that the professional acknowledges the romantic interest to themselves, maintains appropriate boundaries and if objectivity is compromised, raise it with a supervisor immediately so an alternative advisor can be allocated for the client.”