Clients can be your friends and friends can become your clients, but what if the relationship turns into something more than just friends? There is no law in place that says clients cannot become your friends — or more. But you need to have limits and not let a relationship distract you from meeting all your legal and regulatory obligations or affect your professionalism as an advisor.
Here is a true scenario: a woman client became "involved" with her advisor and when he wanted to break it off, he just avoided her telephone calls both on his cellular phone and at the office instead of being direct with her. In turn, the woman became angry and knew that suing her advisor would not only get his attention, but also impact his job and perhaps even his licence negatively if she asserted a regulatory and legal breach.
So, the woman hired a lawyer and sued the advisor and his securities dealer, asserting that the advisor breached both his legal and regulatory obligations by not continuing to service her account and by refusing to accept her telephone calls to adjust her investments at a time when her investments were being impacted negatively by a declining market. She also asserted that she was in a fiduciary relationship with her advisor, citing details of their romantic relationship in the pleading,
The securities dealer was not impressed and worried — as would be the case with most client complaints — about the potential reputational damage. With most cases, the damages and penalties that might result from litigation or regulatory matters are secondary to the threat of reputational damage. Litigation documents are filed with the court and are all publicly available to the press, among others, for a small photocopy fee. In regulatory proceedings, the notices of hearing citing serious allegations and damaging facts set out in support of the allegations, even if untrue, can wreak havoc on an advisor and dealer's reputation as it is circulated and remains on the web several years afterward.
The dealer, in this particular case, decided to bring a motion to strike out several paragraphs of the claim — relating to the details of the advisor's and client's personal lives — on the basis of irrelevance. But the judge denied the relief sought on the basis that these details were supportive of her allegation that they were in a relationship of trust and reliance, which, in turn, were material to her assertion that they were in a fiduciary relationship. (All of this was public as the press picked up the court decision and reported the story.)
So, what can we learn from this? First of all, intimacy does not mix well with servicing your clients. If you are inclined to have a relationship with a client that goes beyond friendship, you will want to refer him or her to another advisor; in fact, it's fine to refer this client to another advisor at your firm. Most advisors have relationships with some of their clients, whether it be close friends or family members. The inclination in respect of carrying on business with these particular clients is to relax formalities, thus breaching some of the rules, such as initialling for your elderly parents or close friends to avoid another meeting. However, you need to be aware that regardless of how close the relationship is, it can go off the rails and lead to a claim — and if you have not followed the rules, that's a big problem. To know your client is a good thing, but to know your clients intimately is not good. To service close family members or friends is good, but to bend the rules for them is not.