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Bending the Rules for Family

A case study in what can happen when your client dies and her heirs take her place.

David J. Drucker, 05/17/2007

I sometimes follow the postings on the NAPFA and FPA discussion forums because they highlight interesting planning conundrums, like the following.

We'll call our advisor who posted her dilemma "Jane," and those who responded will be given similarly bland names to protect the innocent (me). It seems one of Jane's best clients died last year, and the client's two sons came in seeking her help in managing their inheritances. However, contrary to Jane's typical process, the sons were unwilling to provide her with tax returns or other information about their incomes, presumably for privacy reasons. So Jane went public with this case, hoping her fellow advisors could advise her on how best to handle the situation.

Now, most of us in the business for any length of time would probably cut the client's two sons very little slack. Their response would likely be, "My way or the highway," or some variation of that. "I'm not a money manager; I'm a comprehensive planner," they would explain to the sons.

In fact, another advisor--"Bill"--replied to Jane with exactly that advice. In his post, Bill said, "My personal opinion is that, if you have certain requirements of your clients, and either a current client or a prospect is not willing to meet those requirements, you disengage. For instance," continued Bill, "I require that both spouses be present at our initial face-to-face meeting and that they bring with them all of the financial documents that I request, which they must agree to do when the meeting is scheduled. If one of the spouses doesn't show up, or if they don't bring their documents with them, the meeting is over before it begins. I'm not trying to be hard-nosed here, but if a person or a couple isn't willing to make this small commitment and stick to it, I feel that's a strong indication they won't keep any of their commitments, and I simply do not want to work with that kind of client."

Bill represents what I am sure is a widely-held view, and I believe he articulated it well. However, looking at the large number of responses Jane got to her discussion forum post, I had to wonder if there weren't some other ways to look at the matter.

Indeed, not everyone agreed with Bill's view of things. Many thought Jane should give the sons a try and offered ways in which to do it. "Thomas" opened the door with, "Mutual fund companies know nothing about their clients' tax situations and they manage trillions of dollars, so why should you be different if all you will be providing is investment management services?" The question, of course, is does Jane want to be, or does she consider herself to be, just an investment manager--even in some isolated cases?

"Ted" took a very client-centered approach, basing his reasoning on what these particular clients wanted and needed: "As financial advisors, we increase the odds of truly helping our clients by responding to their needs and desires rather than by imposing our world view and accompanying processes upon them. Though [the sons] have a different view of the services they expect, they do seem to make it clear that they want and need your help. It is laudable to adhere to the comprehensive-all-the-time standard but by doing so we, as a group, risk not helping the vast majority of the population who do not want to delegate the quarterback position, who wish to retain control, and who seek out advisor services on a more piecemeal basis."

This is an important issue Ted raises. We've all heard of the categorization of prospective clients as either "do-it-yourselfers," "collaborators" or "delegators." Ted's suggesting that Jane, if she hasn't already, decide which of these client types she wants to work with. If there's room for "collaborators," then perhaps there's room for the sons of her deceased client. These different client types require different approaches.

Ted ends his post with a worthwhile caution: "Of course, cover yourself. Be certain that it is clear, in writing, that you are performing limited services based on the limited information they are willing to provide."

"Gloria" has actually anticipated the eventuality with which Jane is faced and incorporated a solution into her standard operating procedure. She simply treats investment management and financial planning as separate engagements with separate agreements, one for asset management and a retainer agreement for ongoing planning.

Says Gloria, "If the client is only interested in investment management, they only sign an asset management agreement, which includes the following language:

SERVICES NOT COVERED: This agreement covers the initial design and on-going management of your investments ('assets under management'). This agreement does not cover general financial advice or formal financial planning, including, but not limited to, goal setting, insurance needs, cash/debt management, estate planning, income taxes, retirement planning or education planning and funding."

These services are provided under a separate "Retainer Agreement."

What she has done here is separated out not only the investment management portion of her service, but the portfolio design that would be a component of most planners' financial plans, and applied a separate contract to the combination of those two services.

Yet another poster, "Bob," suggests Jane consider using the limited engagement these clients want to educate them on the wisdom of more comprehensive financial planning. "You may start with them as investment clients only, if that makes sense for you, and over time spread a wider umbrella of advice over them. This could help you, them and the profession as a whole," says Bob.

Or, if Jane decides to go along with just the investment management these clients want, she could at least ask them for their tax brackets, advises "Susan."

Failing all of these tactics, "George" counsels Jane to develop a well-defined Investment Policy Statement (IPS) to guide her activities with the sons. "As an advisor specializing in investment management, I do not require all the data you do to manage the client's assets, but I get as much information as necessary to design a Statement of Investment Policy, which both the client and my firm signs. Some of the information gathered may be from conversations but when I put it in the IPS, the client has an opportunity to change it before we both sign off on it," says George.

One thing no one seemed to mention was the net worth of the client. If what you seek are clients with net worths of $1 million or more and the sons are (hypothetically) each worth $5 million in financial assets alone, then you might be willing to bend your rules. If they were younger with modest savings and not related to an existing client, you might not only be unwilling to bend your rules but might not take them as clients in the first place. Some will consider this type of rule-bending a violation of one's principles. Others might see it as simply good business.

One thing's for sure: There's plenty of justification for being flexible. On the other hand, if you want to stick with Bill's approach, and many will see that as necessary to preserve one's integrity, that's fine too.

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