Conflicts Involving Wealth Advisory Team Members
Continuing Education Course Outline
© Tim Voorhees, JD, MBA
ABSTRACT
1. Types of conflicts
a. Kickbacks.
i. Undisclosed
ii. Disclosed rebates
b. Over-rides.
i. Fee sharing
ii. Equity sharing; e.g., giving equity or phantom equity in a
broker/dealer or RIA to referral sources
c. Double, triple, or quadruple-dipping.
i. Charging for legal documents, accounting, appraisals, loans,
investments, insurance, etc.
ii. Charging fixed fees, hourly rates, commisions, and solicitor fees.
d. Quid pro quos.
i. Free trips or rewards
ii. Professional or personal favors
e. Undue influence.
i. Putting pressure on the client’s employer
ii. Putting pressure on the client’s family
f. False Titles
i. Planners working for investment companies which incentivize the
planners to sell internal products.
ii. Stockbrokers paid commisions based on the number or size of
transactions
iii. Banks offering their own or affiliated investment products.
iv. “Independent Planners” with a narrow product choice.
g. Sins of omission
i. Not addressing conflicts because of compensation arrangements
ii. Not providing the best service because of compensation
arrangements
2. Procedural Remedies
i.
ii.
iii.
iv.
Train staff to identify conflicting services
Train staff to identify conflicting relationships.
Train staff to identify conflict motives.
Train staff to identify flags on database reports.
3. Ethical Remedies
a. Fairness guidelines. CFP Rule 402 under the Principal of Fairness is more
explicit still, stating that all material pertinent to the professional relationship
must not only be disclosed, but disclosed in writing:
b. Written disclosures. For example, CFP Rule 402(d) requires specificity to the
proper use of the term "fee-only" when offering wealth planning services.6
4. Statutory Remedies
a. State Bar Rules of Professional Conduct, such as California Rule 3-300,
entitled, "Avoiding Interest Adverse to a Client." These rules apply to
investments between a client and lawyer directly.
b. State court guidelines. See, e.g., Clancy v. State Bar (1969) 71 Cal. 2d
140, 146. Rule 3-300 is held to apply to client investment and assets or
ventures in which the lawyer has an interest. These include situations in
which the lawyer receives compensation for the client's investment. Rose
v. State Bar (1989) 49 Cal. 3d 646, 662-663
c. State Bar ethics opinions address the situation in which a lawyer may render
non-legal services that arise out of a lawyer-client or fiduciary
relationship. Non-legal services, such as investment advice or
accounting services, constitute business transactions with a client.
Accordingly, the lawyer is require to comply with all applicable Rules of
Professional Conduct, such as Cal. Rules Professional Conduct, Rules 3300 and 3-310 [State Bar Formal Opinion No. 1995-141]. Rule 3-300
provides: "A member shall not enter into a business transaction with a client;
or knowingly acquire an ownership, possesory, security, or other pecuniary
interest adverse to a client, unless each of the following requirements has
been satisfied: The transaction or acquisition and its terms are fair
and reasonable to the client and are fully disclosed and transmitted
in writing to the client in a manner which should have been reasonably
understood by the client; and
i. The disclosure is in writing and is clear and conspicuous. The
disclosure shall be a separate document, appropriately entitled,
in 12-point print with one inch of space on all borders.
ii. The disclosure, in a manner that should reasonably have been
understood by that client, is signed by the client, or the
client's conservator, guardian, or agent under a valid
durable power of attorney.
iii. T h e d i s c lo s u r e s t a te s t h a t t h e l a w y e r s h a l l r e c e iv e a
commission and sets forth the amount of the commission
and the actual percentage rate of the commission, if any.
If the actual amount of the commission cannot be
ascertained at the outset of the transaction, the disclosure
shall include the actual percentage rate of the commission
or the alternate ba sis upon which the commission will be
computed, including an example of how the commission
would be calculated.
iv. The disclosure identifies the source of the commission and the
relationship between the source of the commission and
the person receiving the commission.
v. The disclosure is presented to the client at or prior to the time
the recommendation of the financial product is made.
vi. The disclosure advises the client that he or she may obtain
independent advice regarding the purchase of the financial
product and will be given a reasonable opportunity to seek that
advice.
vii. The disclosure contains a statement that the financial product
may be returned to the issuing company within 30 days of
receipt by the client for a refund as set forth in Section
10127.10 of the Insurance Code.
viii. The disclosure contains a statement that if the purchase of the
financial product is for the purposes of Medi-Cal planning, the
client has been advised of other appropriate alternatives, including
spend-down strategies, and of the possibility of obtaining a fair
hearing or obtaining a court order.
5. Judicial remedies
a. Attorneys who violate the provisions of Business and Professions Code §
6175, et seq. in selling financial products to their elder clients are subject to
State Bar discipline (Business and Professions Code § 6175.5) and may be
sued by clients for civil damages and other civil remedies, including
injunctive relief (Business and Professions Code §§ 6175.4; 6175.5, and
6175.6)For example, it is reasonable to interpret that the above statutes, court
cases, and ethical guidelines allowed attorney to advise a client to
purchase insurance, refer the client to an insurance agent for that
purchase, and accept compensation from the insurance agent for the
referral as long as the attorney:
b. A professional who represents that he/she is an expert within the meaning
of California Civil Code § 3372 also face liability. California Civil Code §
3372 entitled, "Liability; Burden of Proof," provides
i. Any person engaged in the business of advising others for
compensation as to the advisability of purchasing, holding or
selling property for investment and who represents himself or
herself to be an expert with respect to investment decisions in such
property, or any class of such property, shall be liable to any person
to whom such advisory services are furnished for compensation and
who is damaged by reason of such person's reliance upon such
services, for the amount of such compensation and for such
damages, unless the person rendering such services proves that such
services were performed with the due care and skill reasonably to be
expected of a person who is such an expert.
6. Professional associations remedies
a. The ABA’s Model Rules of Professional Conduct consider numerous conflict
of interest situations that attorneys may encounter. In general, an attorney is
discouraged from providing services if he or she may have interests
conflicting with those of a client unless (1) the client is given complete
disclosure of the conflict and consents and (2) the attorney is satisfied that
the attorney-client relationship will not be impaired. Also, the client must
have freedom to refuse to accept legal service after disclosure of a conflict
and the attorney may refuse to offer legal service if a conflict is judged of
sufficient weight to impair the attorney-client relationship.
b. Under the AMA Code of Medical Ethics and Council on Ethical and Judicial
Affairs Reports, doctors may not place their own financial interests above the
welfare of their patients. If conflicts develop between a physician’s financial
interest and a physician’s responsibilities to the patient, the conflicts must be
resolved to the patient’s benefit. Even referrals to outside health care
facilities owned in part by the referring physician should be avoided if the
referring physician does not directly provide care at the facility.
c. The AICPA addresses conflicts of interest for member CPAs in its Code of
Professional Conduct, Section 55, regarding objectivity and independence.
Subsection .01 states: "The principle of objectivity imposes the obligation to
be impartial, intellectually honest and free of conflicts of interest."
Subsection .02 reminds members that, "Regardless of service or capacity,
members should protect the integrity of their work, maintain objectivity and
avoid any subordination of their judgment." Moreover, section 56 of the
AICPA code establishes "the obligation to perform professional services to
the best of a member’s ability with concern for the best interest of those for
whom the services are performed and consistent with the profession’s
responsibility to the public."
d. The National Association of Personal Financial Adviser, the nation’s leading
organization dedicated to the advancement of Fee-Only comprehensive
wealth planning, seeks to avoid conflicts by applying its Code of Ethics and
Fiduciary Oath. The oath stipulates that the, “advisor shall be proactive in
disclosure of any conflicts of interest that may impact the client” and “[t]he
advisor shall not accept any referral fees or compensation that is contingent
upon the purchase or sale of a financial product.”
7. Client remedies
a. Ascertain the advisers experience and expertise by reviewing credentials and
independent assessments.
b. Seek second opinions about produce recommendations. If a wealth adviser
recommends investments, insurance, or annuity products, get a second
opinion before you buy. Ask for a written explanation of why the planner
recommends this purchase, and how it fits into a complete wealth plan. Show
this letter when you go for a second opinion.
c. Ask about the adviser’s track record
d. Ask to see samples of the client’s deliverables or ask for a custom deliverable
to see how the client integrates the product into after-tax cash flow
projections or after-tax balance sheet projections.
OUTLINE
8. Types of conflicts
a. Kickbacks. Probably the most common situation involves a financial conflict
of interest. The conflict is between the financial planner providing competent
professional work for a client and making more money for him- or herself.
An example is a financial planner who recommends a financial product that
has the highest commission when the planner has access to a lowercommission product, which still compensates the planner adequately and is
more appropriate for the client. Planners compensated by fees based on
assets or financial planning services also may experience a financial conflict
of interest. If a client’s circumstances and goals indicate additional debt
reduction is appropriate, but the planner recommends additional investments
largely to increase compensation, the planner has yielded to a conflicting
interest and put compensation interests above those of the client. When a
planner who charges fees for formal, printed plans recommends more
planning work than a client’s circumstances and goals indicate, the planner
has again yielded to a financial conflict of interest.
b. Over-rides. Another example of a possible financial conflict of interest
involves the ownership of a broker/dealer. If the conflict does not appear
likely to damage the planner-client relationship or the resulting planning
work, complete disclosure of the conflicting interest is appropriate. If the
owner feels sufficiently conflicted by concern for the growth of the
broker/dealer as to impair significantly the planner-client relationship or
resulting financial planning, then the owner could reduce or eliminate the
source of the conflict. Selling or transferring the ownership of the
broker/dealer to another legal entity may accomplish this. If the planner is
unwilling to take this or another action to remove ownership, then he or she
should consider refusing to provide planning services.
c. Double, triple, or quadruple-dipping. Would a financial conflict of interest be
eliminated with the change in compensation from commissions to fees
alone? Probably not, as the desire to make as high an income as possible can
be accomplished by charging high fees as well as by using the highest
commission products. The remaining questions are the same: Is the plannerclient relationship significantly likely to be impaired by the fees charged and
is the quality of the resulting plan and products likely to be damaged by the
level of fees charged? If the answer to either question is yes, the planner
should consider reducing or eliminating the cause of the conflict, perhaps
with lowering or changing the fee structure. If this is not desired, the planner
should consider refusing to offer planning service. Note that any competent
professional will actively control for any bias introduced by the
compensation mechanism. Therefore, none of the issues raised here
represent an insurmountable flaw of a particular method of compensation.
Too often this sort of analysis can degnerate into a mudslinging contest
that suggests there is only one right way to handle every situation, which
is simply not the case.
i. Hourly rate When a financial planner is paid an hourly rate, he or
she may have a bias towards selling the client more advice than is
needed, and/or selling additional hourly services to the client.
However, the actual financial product sold to the client, or even if
any is sold at all, is a matter of indifference. A practical problem is
that this advice, if done properly (thorough investigation by adviser
into the entire background of the client) is going to be very
expensive because it needs to be customized to the client. Thus, we
see very little of this type of advice except for specialized areas
(like taxation, business law, etc.).
ii. Flat rate If a financial planner is paid a flat rate, he or she may
have a bias towards giving the client canned advice in order to gain
efficiencies. That can lead to not tailoring the advice to the specific
situation because that adds (uncompensated) time to the
engagement. Additionally, there's a bias towards selling additional
services not included in the initial package. Again, generally
indifference as to whether a sale is closed on an actual investment,
or which investment actually gets chosen. The advantage to the
client is that he or she knows the cost going in.
iii. Percent of assets under management paid annually If a financial
planner receives each year a percentage of assets under
management, he or she may have a bias towards keeping as much
under management as possible, thus leading to some bias against
using funds for other purposes (including paying down debt). This
structure may also encourage the advising of riskier ventures, since
they present the adviser with the potential for higher compensation.
Obviously, the client does have to put some assets under
management (so there is a bias to do something), but the particular
investments are a matter of indifference.
iv. Commissions on sales When a planner receives a commission on
any product sold to the client, this can lead to a bias towards
closing the sale on a product that will pay the adviser a
commission and discouraging the acquisition of products that
won't pay this adviser a commission. Since advice is offered as a
method to encourage the client to get moving towards a buy, these
advisers tend to be rather thorough in raising issues that relate to
their products (finding needs). Will tend to have a bias to be less
thorough in raising issues for which the solution doesn't involve
their product (so in estate planning there will be lots of talk about
ILITs or CRUTs, but little talk about FLPs, AB trusts, etc.). A
practical advantage is that because the client can simply walk
away, this can be the least expensive way to get a good quick
general education on the subject at hand. Also, many investments
sold by commissioned salespeople spread the fee over a number of
years, so it becomes a payment on the installment plan that may
allow some people to receive advice they need.
d. Quid pro quos. A second type of conflict is more subtle and may be called a
structural conflict of interest. An example is a financial planner who serves
e.
f.
g.
h.
i.
j.
on the board of directors of a company that is a prospective client’s
employer. Here the conflict would be between the financial planner
providing rigorous professional work for the client and the planner bringing
unprofessional pressure upon the client to implement planning
recommendations because of the planner’s position of influence with the
client’s employer.
Undue influence. Another example of a structural conflict of interest
involves a financial planner who provides financial advice as a benefit paid
for by the employer. In this instance, the planner has loyalty both to the
employer and to the advisory clients. In addition, as the employer pays for
the services, the planner may have additional influence on advisory clients
due to the employer’s support of the service. The planner must assess the
degree of conflict arising from the dual loyalty and must question if the
support of the employer for advisory services may impair the planner-client
relationship or resulting financial planning..
Referrals to less qualified advisers. A third type of conflict of interest may
be the subtlest of all, but is relatively common. This conflict can be called
a personal conflict of interest and involves engaging in a planning
relationship with a friend or relative. The conflict would be between the
planner providing rigorous professional work for the client, yet struggling
not to say or do anything that might put a valued personal relationship at
risk.
False Titles
i. Planners Who Work for an Investment Company First, you will
find financial planners who are employed by a particular
investment management company. These individuals have
financial incentives to sell that company’s products. When
giving you financial advice, ElderNet believes that the financial
incentives to sell their employer's products can work against
your Second, stockbrokers sometimes call themselves financial
planners. ElderNet believes that these persons also have a
conflict of interest.
Stockbrokers Brokers have a financial interest in buying and selling
your investments from time to time, whether or not a new transaction
is really necessary. If your planner is paid by commissions from sales
of your investments, he or she may be influenced to trade products
that should be left alone. This could cost you money and negatively
impact the quality of your investments.
Banks Finally, banks often offer financial planning services. Most banks,
however, offer only their own or affiliated investment products. Like the
two situations described above, a bank has a conflict of interest if it tries to
serve as a financial advisor for you while trying to get you to buy its
particular products.
“Independent Planners” with a narrow product choice. The key to good
results from a financial planner is to make sure you hire an independent
professional whose first and only concern is the best possible financial
plan for you. Avoid planners who are identified with the products they
sell, or who are paid only as brokers. Even independent brokers, however,
can have conflicts of interest with respect to certain high-commission
products, such as insurance and annuity policies. Unscrupulous agents may
recommend insurance products without providing any meaningful review of
your investment needs, options or goals. The isolated purchase of insurance
or annuities usually does not make you any more secure than you were
before, and in the meantime the agent earns a quick commission -- which
may be all that he or she was really concerned about in the first place.
9. Procedural Remedies
a. Train Staff to identify conflicts
i. Identify conflicting services Though confident they can spot and
handle a conflict of interest, most CPAs struggle with actually
defining the term, according to Aon Insurance Services Typical
examples of CPAs becoming ensnared in conflicts of interest can
involve tax and financial planning advice for a married couple who
later divorce, trustee services for a family for some members of
which the CPA also does tax services, investment recommendations
to high-net-worth clients that involve a business for which the firm
also does consulting and tax planning, and, prep services to
partnerships and to individuals within the partnership.
ii. Identify Conflicting relationships. Aon recommended that all firm
personnel be able and ready to identify relationships and situations
that could be viewed by others as presenting a conflict, and should be
trained on the subject. Staff professionals should be instructed to
immediately bring potential conflict situations to the attention of firm
management.
iii. Identify conflict motives. To identify possible conflicts, inquire about
the prospective client's major business relationships, such as key
clients, lenders and vendors, Aon advised, and determine the
intended use and distribution of your proposed work product. If
there will be third-party users, identify known users, and determine if
your firm has professional relationships with the users that present an
actual or potential conflict.
iv. Identify flags on database reports. In addition, all firms should
maintain a continuously updated database of client information.
Minimum contents should include the name of the client and
affiliated entities; the type of client (individual, public/private
company, not-for profit, etc.) and SIC code; names of owners, senior
officers and directors, including contact numbers and e-mail
addresses; principal banking and investment banking relationships;
names of legal counsel and other key advisors and consultants; major
customers and vendors; and the name/office of the current
engagement partner and services provided.
10. Ethical Remedies
a. Fairness guidelines. A CFP designee shall perform professional services in a
manner that is fair and reasonable to clients, principals, partners and
employers and shall disclose conflict(s) of interest(s) in providing such
services. Fairness requires impartiality, intellectual honesty and disclosure of
conflict(s) of interest(s). It involves a subordination of one’s own feelings,
prejudices and desires so as to achieve a proper balance of conflicting
interests. Fairness is treating others in the same fashion that you would want
to be treated and is an essential trait of any professional.5 Rule 402 under the
Principal of Fairness is more explicit still, stating that all material pertinent to
the professional relationship must not only be disclosed, but disclosed in
writing:
b. Written disclosures. A financial planning practitioner shall make timely
written disclosure of all material information relative to the professional
relationship. In all circumstances such disclosure shall include conflict(s) of
interest(s) and sources of compensation. Written disclosures that include the
following information are considered to be in compliance with this Rule:…(f)
A statement identifying conflict(s) of interest(s).Further evidence of the
importance of full written disclosure in general within the CFP Board’s Code
is found in Advisory Opinions 97-1 and 97-2, which provide additional
guidance on Rule 402(d) by adding specificity to the proper use of the term
"fee-only" in relation to offering financial planning services.6
11. Statutory Remedies
a. First, it is my conclusion that your multi-disciplinary practice is subject to the
requirements of the California State Bar Rules of Professional Conduct,
Rule 3-300, entitled, "Avoiding Interest Adverse to a Client." This rule
applies to investments between a client and lawyer directly. Clancy v.
State Bar (1969) 71 Cal. 2d 140, 146. The prior rules from which Rule
3-300 is derived have also been held to apply to client investment and assets
or ventures in which the lawyer has an interest. These include situations in
which the lawyer receives compensation for the client's investment. Rose
v. State Bar (1989) 49 Cal. 3d 646, 662-663 (investment in restaurant
business for which lawyer receives commission).
b. An emerging area in which Rule 3-300 is being applied is in the field of
non-legal services rendered by a lawyer or a lawyer-controlled entity to a
client. The term "non-legal services" refers to services that are not
performed in connection with the practice of law and which may be
performed by non-lawyers without constituting the practice of law. One
State Bar ethics opinion addresses the situation in which a lawyer may
render non-legal services that arise out of a lawyer-client or fiduciary
relationship. Non-legal services, such as investment advice or
accounting services, constitute business transactions with a client.
Accordingly, the lawyer is require to comply with all applicable Rules of
Professional Conduct, including Cal. Rules Professional Rof. Conduct,
Rules 3-300 and 3-310 [State Bar Formal Opinion No. 1995-141; see also,
Cal. State Bar Formal B Opinion No. 1999-154] CRPC, Rule 3-300 provides:
"A member shall not enter into a business transaction with a client; or
knowingly acquire an ownership, possesory, security, or other pecuniary
interest adverse to a client, unless each of the following requirements has
been satisfied; The transaction or acquisition and its terms are fair
and reasonable to the client and are fully disclosed and transmitted
in writing to the client in a manner which should have been reasonably
understood by the client; and
(A)
The client is advised in writing that the client may seek the advice of an
independent lawyer of the client's choice and is given a reasonable opportunity to seek
that advice; and
(B)
The client thereafter consents in writing to the terms of the transaction or
the terms of the acquisition." (Emphasis added.)
Under certain circumstances, it is ethically permissible for an attorney to advise a client
to purchase insurance, refer the client to an insurance agent for that purchase, and
accept compensation from the insurance agent for the referral. To avoid an ethical
violation, the attorney must do all of the following [State Bar Formal Opinion No. 1995140]:

Make full disclosure in writing to the client under CRPC, Rule 3-310(B)(4), of
a l l re l e v a n t c i rc u m s ta n c e s a n d a ll a c t ua l o r r e a s o n a b l y f o r e s e e a b le
consequences to the client.

Comply with CRPC, Rule 3-300 regarding written consent.

Be capable of competently advising the client under the circumstances.
An attorney may directly sell financial products, including long-term insurance, life
insurance and annuities governed by the Insurance Code or its successors, to clients who are
elders or dependent elders with whom the attorney has an attorney-client
relationship within the proceeding three (3) years if the transaction is fair and reasonable
to the client and the attorney provides the client with a written disclosure that contains
specified information about the financial product being sold and the terms of the
proposed sale. California Business and Professions Code § 6175.3. Section 6175.3
entitled, "Sale of Financial Products to Elder or Dependent Adult Adults; Disclosure,"
provides:
A lawyer, while acting as a fiduciary, may sell financial products to a client who is an elder or
dependent adult with whom the lawyer has or has had, within the preceding three years, an
attorney-client relationship, if the transaction or acquisition and its terms are fair and
reasonable to the client, and if the lawyer provides that client with a disclosure that
satisfies all of the following conditions:
(a)
The disclosure is in writing and is clear and conspicuous. The disclosure shall be a
separate document, appropriately entitled, in 12-point print with one inch of space on all
borders.
(b)
The disclosure, in a manner that should reasonably have been understood by that
client, is signed by the client, or the client's conservator, guardian, or agent
under a valid durable power of attorney.
(c)
T h e d i s c lo s u r e s t a te s t h a t t h e l a w y e r s h a l l r e c e iv e a commission
and sets forth the amount of the commission and the actual percentage rate of
the commission, if any. If the actual amount of the commission cannot be
ascertained at the outset of the transaction, the disclosure shall include the
actual percentage rate of the commission or the alterna te basis upon which
the commission will be computed, including an example of how the commission
would be calculated.
(d)
The disclosure identifies the source of the commission and the relationship
between the source of the commission and the person receiving the commission.
The disclosure is presented to the client at or prior to the time the
recommendation of the financial product is made.
(f)
The disclosure advises the client that he or she may obtain independent advice
regarding the purchase of the financial product and will be given a reasonable opportunity
to seek that advice.
(g)
The disclosure contains a statement that the financial product may be returned
to the issuing company within 30 days of receipt by the client for a refund as set
forth in Section 10127.10 of the Insurance Code.
(h)
The disclosure contains a statement that if the purchase of the financial product is
for the purposes of Medi-Cal planning, the client has been advised of other appropriate
alternatives, including spend-down strategies, and of the possibility of obtaining a fair
hearing or obtaining a court order.
Attorneys who violate the provisions of Business and Professions Code § 6175, et seq.
in selling financial products to their elder clients are subject to State Bar discipline (Business and
Professions Code § 6175.5) and may be sued by clients for civil damages and other civil
remedies, including injunctive relief (Business and Professions Code §§ 6175.4; 6175.5, and
6175.6)
Additionally, a person who represents that they are an expert within the meaning of
California Civil Code § 3372 also face liability. California Civil Code § 3372 entitled,
"Liability; Burden of Proof," provides
(a) Any person engaged in the business of advising others for compensation as
to the advisability of purchasing, holding or selling property for investment and who
represents himself or herself to be an expert with respect to investment decisions in such
property, or any class of such property, shall be liable to any person to whom such advisory
services are furnished for compensation and who is damaged by reason of such person's
reliance upon such services, for the amount of such compensation and for such damages,
unless the person rendering such services proves that such services were performed with the
due care and skill reasonably to be expected of a person who is such an expert.
(b)
For the purposes of this section, the following apply:
(1) A person represents that such person is an "expert" within the meaning of this section
if such person represents that he or she is a "financial planner," "financial adviser,"
"financial counselor," "financial consultant" or an "investment adviser," "investment
counselor" or "investment consultant" or that such person renders "financial planning
services," "financial advisory services," "financial counseling services," "financial
consulting services" or "investment advisory services," "investment counseling
services" or "investment consulting services" or makes substantially equivalent
representations with respect to such person's business or qualifications.
(2) "Person" includes an individual, corporation, partnership, limited liability
company, joint venture, an association, joint stock company, a trust or
unincorporated association.
(c)
The following persons are not liable under the provisions of this section:
(1) Any person, when engaged in the purchase or sale of tangible personal property for
his or her own account, and the agents and employees of such persons.
Any person, and the agents and employees of such person, licensed under, exempted from
licensing under, or not subject to licensing under by reason of an express exclusion from a
definition contained in, the Commodity Exchange Act, the Investment Advisers Act of
1940, the California Commodity Law, the Corporate Securities Law of 1968, the Insurance
(e)
Code, the Real Estate Law, or any state or federal law for the licensing and regulation of
banks or savings and loan associations.
I would recommend that your Financial Consulting Client Disclosure Form,
regardless of whether the client is an "elder or dependent adult" set forth, to the extent it is
known, all of the information in California Business and Professions Code § 6175.3. When
unknown information becomes available, it should be communicated in writing to the client
and countersigned by the client. This will ensure compliance with California Business and
Professions Code § 6175.3 and CRPC, Rules 3-300 and 3-310.
Additionally, in Mayhew v. Benninghoff (1997) 53 Cal. App. 4th 1365, 1369-1370, an
attorney who rendered both legal and non-legal services to a client could not rely on an
arbitration clause in his agreement letter to require arbitration of disputes arising out of a
business transaction with the client. The engagement letter did not explain what it covered,
and the client's explanation that he expected the arbitration clause only to extend to the
attorney's legal representation for the client's divorce, and not to his financial investments,
was "imminently reasonable." If the attorney wanted the arbitration clause to extend to
the rendering of legal services and to unrelated business dealings, the attorney had the
responsibility to draft a clear and explicit agreement to that effect and, pursuant to CRPC
Rule 3-300, to advise the client of his right to independent legal advice.
In conclusion, I recommend that you bring the Financial Consulting Client Disclosure Form
and subsequently transmitted forms to be signed by the client in compliance with California
Business and Professions Code § 6175.3, CRPC Rules 3-300 and 3-310.
c.
12. professional associations remedies We will briefly review the codes of practice of the
American Bar Association (ABA), the American Medical Association (AMA) and the
American Institute of Certified Public Accountants (AICPA). Each of these
associations has disciplinary measures for noncompliance with their codes.
a. The ABA’s Model Rules of Professional Conduct (2001 edition) considers a
number of conflict of interest situations that attorneys may encounter.
Generally, an attorney is encouraged not to engage in service where he or she
may have interests conflicting with those of a client unless (1) the client is
given complete disclosure of the conflict and consents and (2) the attorney is
satisfied that the attorney-client relationship will not be impaired. Thus, the
client may refuse to accept legal service after disclosure of a conflict and the
attorney may refuse to offer legal service if a conflict is judged of sufficient
weight to impair the attorney-client relationship.2
b. In the AMA Code of Medical Ethics and Council on Ethical and Judicial
Affairs Reports, physicians may never place their own financial interests
above the welfare of their patients. If a conflict develops between the
physician’s financial interest and the physician’s responsibilities to the patient,
the conflict must be resolved to the patient’s benefit. Regarding biomedical
research, an even stronger directive is provided. Real or perceived conflicts
of interest between scientific objectivity and personal interests must be
avoided. Examples of suggested behavior when contracted to do research for
the company include not purchasing a company’s stock, ensuring that
compensation is for research efforts alone and disclosing all ties to
contracting companies to all pertinent parties, including publications. Finally,
even referrals to outside health care facilities in which the referring physician
has an ownership interest should be avoided if the referring physician does
not directly provide care at the facility. Apparently the assumption is that if
the physician provides care at the referred-to facility, his or her professional
interests will provide some offset for potentially conflicting ownership
interest.3
c. The AICPA considers conflicts of interest for member CPAs in its Code of
Professional Conduct, Section 55, regarding objectivity and independence.
Subsection .01 states: "The principle of objectivity imposes the obligation to
be impartial, intellectually honest and free of conflicts of interest."
Subsection .02 closes with the comment: "Regardless of service or capacity,
members should protect the integrity of their work, maintain objectivity and
avoid any subordination of their judgment." Members who provide auditing
and other attestation services are enjoined not only to be objective but also
independent in fact and appearance. Section 56 of the AICPA code
indirectly addresses conflicts of interest in discussing due care, which
imposes "the obligation to perform professional services to the best of a
member’s ability with concern for the best interest of those for whom the
services are performed and consistent with the profession’s responsibility to
the public."4
d. NAPFA Code of Ethics, 2001, www.napfa.org/whoweare.htm#ethics;
NAPFA Fiduciary Oath, 2001, www.napfa.org/whoweare.htm#ethics;
AICPA Code of Professional Conduct, op. cit.; Code of Professional
Responsibility of the Society of Financial Service Professionals, 2000,
www.financialpro.org.
13. Client remedies
a. If a financial planner recommends investment in insurance or annuity
products, get a second opinion before you buy. Ask for a written
explanation of why the planner recommends this purchase, and how it fits
into a complete financial plan. Show this letter when you go for a second
opinion.
C:\Current\FOS\WorkingPapers\ConflictsOfInterest-ElderNet.doc
Conflicts of Interest in Financial Planning Practice by Frank C. Bearden, ChFC, CLU
hkcGerberSection675-5pageReview.pdf
C:\Current\FOS\WorkingPapers\ConflictsOfInterest-CobeCoApril2000.doc
C:\Current\FOS\WorkingPapers\ConflictsOfInterest-WEbCPA-May2005.doc