conflict of interest illustration

As advisors are under constant pressure to grow their businesses, they’re often not attuned to decisions that place them into potential, perceived or actual conflicts of interest that could end their careers.

To avoid making career-ending mistakes related to conflicts of interest, here are four steps advisors should follow:

1. Read your internal policy manual and identify what your dealer describes as conflicts of interest, both expressed and implied, and understand why these conflicts are prohibited. Examples include being the power of attorney for a client or entering into any type of business deal with a client.

2. Understand that what you can’t do directly, you also can’t do indirectly. For example, if your brother borrows money from your client, and you then borrow the money from your brother, that’s just window dressing. In effect, you still are borrowing from the client even though this arrangement is through your brother. This is a conflict of interest and prohibited.

3. Realize that potential or perceived conflicts of interest also are problematic. Let’s say you learn that you are the alternate executor in a client’s last will and testament. While the client is alive, this arrangement isn’t an actual conflict; and as the alternate executor, the primary executor would also have to pass away before you would be required to fill that role. Even though this example is only a potential conflict of interest, it’s still a conflict and contrary to your firm’s policy, even if your dealer’s policy manual doesn’t specify “alternate” executors.

4. Err on the side of disclosure to your dealer. Do not engage in business with the view that it’s better to ask forgiveness than to ask for permission — in fact, the reverse is true. Be sure to ask the right person for permission. Sometimes, advisors have a casual “what if…” conversation with their supervisor and the supervisor gives a casual off-the-cuff answer that the advisor interprets as express permission.

A question related to conflicts of interest should be addressed to someone who has thorough understanding of the applicable regulations and rules as well as the internal policy manual. Furthermore, you need to seek permission from someone with authority to grant you permission, after providing them with details of the actual situation. Instead of describing a “ what if…” scenario, explain the situation in full detail: “My cousin, John Doe, is a client of another advisor at this firm, Sam Smith. So, John is not my client, but he wants to lend me money to buy half of our grandmother’s cottage.”

If permission is granted, set out the details in writing. For example, the document could say: “Further to our conversation on (insert date), you confirmed at that time that my cousin, John Doe, a client of Sam Smith, is permitted to lend me $150,000 so he and I can buy my grandmother’s cottage. Attached are the draft loan documents for your information.”

Keep a copy of this email in a safe location, just in case your activities are called into question. You will then have proof that specifics were provided and permission was granted.

Understand that any verbal permission puts you at risk, as memories fade with the passage of time. This means that a casual conversation without proper follow-up may later be denied ever having happened.