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Should you provide financial advice to your parents?

BY MICHAEL MILLER | THURSDAY, 11 NOV 2021   2:46PM

I have provided retirement planning to my parents in the past, but I wouldn't do it again after attending a masterclass on conflicts of interest and ethics.

When we talk about conflicts of interest, the Financial Adviser Standard and Ethics Authority's Standard 3 of the Code of Ethics - "You must not advise, refer or act in any other manner where you have a conflict of interest or duty" - is the obvious starting point.

I think that the potential for a conflict of interest stems from the actual parent and child involved, and from broader societal expectations about how a parent and child relationship works.

In practice, I have come across scenarios where I thought:

  • Parents were providing financial support to a child at a level that compromised the ability to meet their own reasonable financial goals; or
  • A child's financial circumstances were entirely reliant on receiving financial support from their parents (e.g. a retirement plan that would not work without an inheritance).

There is certainly a potential conflict of interest for the child/planner in being a beneficiary of their parents' estates. Some factors that may contribute to how pressing that conflict might be are:

  • Whether there are other siblings or potential beneficiaries - I don't think the absence of these parties means there is no conflict, but more potential beneficiaries does heighten the potential for conflicts;
  • Blended families may also increase the incidence of competing or conflicting interests, as well as the perception of conflict; and
  • It's perfectly normal that a family will involve conflict, and circumstances where all members of the family may receive unequal treatment.

FASEA's 2020 guidance on this emphasises the importance of considering whether a conflict might exist, or its potential to exist in the future, well before that conflict may arise:

"This requires advisers to make a professional assessment as to whether their personal interests or other personal duties/relationships are incompatible or at variance with the interests of, and duties owed to their client.

"The Code requires advisers making an assessment of conflict to ensure that, before giving advice, they have met the ethical values and standards contained in the Code and to confirm that their client's interests are given priority and are not in conflict with any personal interest or other interests. The adviser must remain alert to changes in facts and circumstances that could affect this assessment and continue to assess conflicts during their advice relationship on an ongoing basis."

One of the values in the FASEA's  code is fairness. The definition of what is fair and what is not is contestable at the best of times. With siblings? I'm sure many of us have seen a ruler used to measure the fair distribution of a chocolate cake. Fairness is also highlighted in Principle 4 of the FPA Code of Professional Practice.

The legislative instrument that introduced the FASEA Code of Ethics brings an interesting element to the concept of fairness:

"Acting to demonstrate, realise and promote the value of fairness requires that you bring professional objectivity to the task of engaging clients professionally..."

The question this raised for me was: can you be sufficiently objective with somebody you're as close to as your parents?

Rules 7.35 & 7.36 of the FPA Code of Professional Practice provide that you should not lend money to, or borrow money from, a client, with the exception being immediate family members. This is some recognition that it isn't possible to put a clear line between actions as a financial adviser and as a family member.

The FASEA Code of Ethics value of honesty is also relevant to the scenario of a child advising their parent. While the value of honesty refers more to the requirement of the adviser to conduct themselves with honesty, it is also relevant that we create an environment where our clients can be honest with us.

I reflected on the (sometimes surprising!) level of candour that clients display when telling us about their children, lives, relations, and the decisions they have made. This candour is extremely helpful in properly understanding a clients' circumstances and how that relates to their goals, and decisions made about estate planning.

If you are providing advice to your parents - are you giving them the opportunity to be as open about their goals and plans, as you are for your other clients?

Code of Ethics Standard 2 - "You must act with integrity and in the best interests of each of your clients"- is very wide-ranging.

But the FASEA 2020 guidance on this standard is highly applicable to the scenario where you aren't creating an environment where your client can be entirely candid with you.

In assessing whether you have considered the requirements of Standard 2, you may consider the following:

• Have I been honest and frank in all interactions with the client?

• Have I enquired effectively to understand the client's needs and circumstances?

• Is my advice consistent with the client's purpose in seeking advice?

• Does it appear that the client has withheld any information?

• Will the advice and recommendations improve the client's financial wellbeing?

My conclusion is that it's not suitable to act as a financial planner for your parents, because there exists high potential for real and/or perceived conflicts of interest.

More importantly, the parent-child relationship prevents the full and honest discussions necessary for a good planner-client relationship.

5 comments so far
  

Personally I would disagree.

As our parents age and begin to enter retirement and beyond, they will be seeking someone experienced and who they can trust.

It is quite common for one sibling to take on responsibility for their ageing parents in many ways. Especially up to and including possible entering of age care.

It is important to ensure other siblings understand and respect your role.

If a financial planner does not feel comfortable in providing advice to their own family members, I guess I question how they can also for their long-standing and trusting clients.

I would not get too hung up on quoting FASEA to explain how to do what is right.

Just my humble opinion.

MARTIN BALL  |  15 NOV 2021   10.46AM
  

Hi Martin

The issue with a child providing financial advice to their parents is not one of competency or even trust.

It's that in this instance the financial planner has dual roles as a child and a professional financial adviser.

You are correct that the role as a child may mean there is a greater level of trust.

But the relationship between parent and child has a layer of expectations to it that come from broader societal expectations, as well as the specifics of the particular relationship. For example, some cultural backgrounds might put respecting a parents' wishes as a higher priority than being completely honest.

When an ageing parent requires care, there is potentially a difference between the parent's desire for care from children, and the children's capacity, desire or willingness to provide care.

As a financial planner we owe our clients an environment where they can be forthright about their wishes.

This environment is created when we're an objective adviser for our clients' goals. It is compromised when achieving those goals are to our own benefit, or at our own expense.

No matter what your area of practice, there is always another adviser who is at least as competent as you are, and can work for your parents' benefit without the potential or perceived conflict of the individual who is both adviser and child.

MICHAEL MILLER  |  18 NOV 2021   3.09PM
  

Wholeheartedly disagree. There are so many points it's not worth listing. However, you must respect an Advisers professional judgement in determining whether a conflict exists and if it is able to be managed. There would be instances where it is not appropriate, yes. To throw a blanket over all advice to parents and to declare it inappropriate is not right.

STEVEN NICKELSON  |  22 NOV 2021   8.46AM
  

What a fascinating start to responses to this article!

Financial planners who have transitioned into this industry from an Accounting (and possibly, other professional) background will agree with the conclusion that author Michael has come to in the article.

Codes of Ethics deal with a range of matters, but conflict of interest, real or perceived, is a significant taboo - or at least should be, for all of us.

For those who fail to see the potential risk in this, I trust that their family relationships are very solid and that siblings and other close relatives don't find any aggrievement in how they are managing their parents affairs (and I trust that they are appropriately taking these person's interests into account in the advice process).

ERIC WALTERS  |  22 NOV 2021   11.27AM
  

Hi Steven

It's the (potential) conflict of interest that often grabs the attention, with the heightened level of attention around standard 3 this is probably natural.

For me, it is the duties of honesty that we owe to all of our clients that is more difficult with family. Our non-family clients speak to us with a level of candour, often about their family, precisely because we are not their family, and we are engaged to consider their interests only.

It's this candour between client and planner that I think is compromised when providing advice to parents, be it because of the specifics of the relationship between the parties, or just what we're conditioned to expect about these relationships by society.

When you combine that with the availability of other great planners who can help our parents, with all the candour the parties deserve, it just seems like such a better solution for our parents, and there will certainly be another client who isn't a family member, who needs your assistance in the same way.

MICHAEL MILLER  |  22 NOV 2021   1.37PM