Advisors place themselves at great risk when they're given the account passwords for — and, in turn, access — clients' and other investors' discount brokerage accounts. Specifically, advisors expose themselves to penalties, reputational damage and potential termination of employment.
Investors open online discount brokerage accounts because they believe they can make money without paying the higher fees for full-service advice. However, they're not shy to ask registered advisors for help. Such a discussion could lead to investors providing advisors with their passwords to review, monitor and even trade on these investors' online brokerage account.
There are limitless examples of how this could happen; here are a few:
- Advisors are asked to do favours for close family or friends.
- Advisors offer this as an additional, free service to some or all of their clients.
- An advisor manages the lion's share of a client's assets in a full-service account, but the client has limited assets in an online discount brokerage account for his or her TFSA.
- Close friends or family members don't have sufficient assets to get the advice of qualified advisor but ask the advisor for help.
- Wealthy clients' children or beneficiaries ask advisors for favours.
Even if advisors providing this service obtain no financial benefit, they place themselves at risk. By logging into the accounts with the clients' passwords, advisors are effectively impersonating their clients and this is likely a violation of the online agreement. Any protections offered to clients are likely waived with this breach. This could lead the accountholder to look to the advisor to replace these protections.
Worse, however, is that the advisor is also violating the terms of his or her own employment in the following ways:
- Not putting his or her full time and attention to the current employment with his or her dealer, which is a standard term of contract.
- Failing to disclose an outside business activity (OBA). Any OBA needs to be disclosed to the dealer an advisor is registered with, even if the advisor doesn't charge a fee for it; the dealer must also approved this in advance. Accessing someone's online discount brokerage account would not be approved as the dealer cannot monitor it and could create a conflict of Interest.
- An advisor might be accused of engaging in personal financial dealings if there is any benefit that flows to the advisor based on success of the trades.
- Misleading the advisor's dealer on annual questionnaires, which specifically asks advisors to declare any OBA.
The reason this is such a serious violation is that your dealer is unable to supervise this trading. You might ask how this would be discovered. There are many ways. For example, there could be emails between advisors and clients discussing this in detail, which the regulator or dealer could discover during an audit; or, there could be client complaints arising from losses in the online account. Yes, even close friends and family complain against advisors.
So don't do people favours that could put you at risk. Even if they ask you to take a quick look at their accounts, resist by saying that this is a serious violation of both their online account agreement, which puts investors at risk, as well as a violation of advisors' regulatory and contractual obligations, which could lead to significant financial penalties from the regulators as well as termination of employment.