Retirement Plan Business
Marguerita Cheng’s father taught her the joys of being a financial advisor. But he also pushed her to find the courage and strength to be a true fiduciary — even if clients don’t agree with you at first.
Cheng, chief executive officer of Blue Ocean Global Wealth, a Washington, D.C.-based RIA, watched as her financially savvy father weakened due to the ravages of Parkinson’s disease. He went from someone managing his own portfolio to routinely locking himself out of his brokerage account by forgetting his password too many times. It came to a point where Cheng recommended his access to online brokerage accounts be limited to only viewing balances and not trading. “It was truly in his best interest to protect the client from himself,” Cheng says.
It’s a personal story, but one that speaks to an ethical dilemma many RIAs face, or will face. Fiduciaries are tasked to recommend what’s best for their clients, and that’s true even if clients don’t appreciate the advice at first. Cheng routinely finds situations where clients are engaged in financial behavior that exposes them to undue risks — but are initially resistant to correct the behavior.
“The definition of fiduciary means putting your client’s interests before those of your own, but we do face ethical dilemmas,” Cheng says.
RIAs can prepare for cases where they might need to save clients from themselves by:
Predictable sticking points arise with clients. One of the more common ones, Cheng says, is over concentrated equity positions. Clients might accumulate a large amount of individual equities, either because they are highly convicted in its value or have inherited shares that have sentimental value. Clients might also build large positions after receiving stock-based compensation from a company.
No matter the cause, clients can be resistant to diversification, despite the benefit to their long-term portfolio, Cheng says. Come prepared with research explaining the risk the client is taking. Capital Group Research shows any position of 10% or greater in a portfolio should be evaluated and provides helpful talking points that address the risk of concentration. For tax-aware clients, there are also opportunities to diversify a large position other than selling, such as donating to charity.
Estate planning is another place clients might push against what’s best for them. It’s common for even some high net worth clients to put off creating a will or living trust.
Elderly clients might come up with their own misguided financial moves. Other times they might be getting misled elsewhere. Seniors lose nearly $37 billion annually to financial abuse, according to a 2015 analysis by True Link. More than a third of seniors are hurt by financial abuse in any five-year period.
Senior financial abuse costs $36.5 billion annually.
Elderly clients are a big target for fraud.
|CATEGORY||ANNUAL COST TO SENIORS ($ bil.)||DEFINING FEATURE||EXAMPLES|
|Exploitation||$17.0||Operating openly claiming consent of victim||*Hidden shipping and handling
*Misleading financial advice
|Con artists||$9.9||*Grandparent scam
*Nigerian prince emails
|Identify theft||$2.9||*Opening new accounts
*Using card data in phishing
*Rewritten laws or powers of attorney
Source: True Link, 2015
Fiduciaries may choose to play a more proactive role in making sure senior clients follow advice that’s in their best interest due to new rules. The Senior Safe Act, passed in May 2018, gives advisors safe harbor to notify others if they suspect elder abuse, Cheng says. Previously, Cheng might have been less proactive to remain compliant with confidentiality standards. But now she sees an expanded role she can play as a fiduciary.
Now, Cheng asks all older clients, “If for whatever reason I don’t hear from you, say, in two weeks, is there a person I can appoint to contact?” This isn’t a person who has powers of attorney or trading rights. It’s an additional person who will know where the client is. Cheng captures this person’s name in the client’s file, in addition to the standard contacts.
Blue Ocean Global Wealth doesn’t take money-management-only clients. Instead, the firm uses and creates complete financial plans, which allows Cheng to better explain all the decisions in context of overall client goals. For instance, if managing longevity risk is a goal – for a client who expects to live to 100 — diversification becomes all the more important. It’s also important for advisors to ask the right questions so they build a very detailed picture of the client.
A Personal Story: RIA Learns from Her Father
So, but one of the reasons why I am so passionate about ethics education is I actually experienced an ethical dilemma. Um, here's what happened to me. So, I do believe I'm a financial planner because of the, uh, incredible wisdom my dad imparted upon me at a young age. While I didn't understand the discipline of personal finance when I was, uh, in elementary, middle, and high school, my dad taught me a lot. He taught me how to read Value Line. He showed me the stock he purchased through, uh, employee stock purchase plan, and that's how I was able to go to college. Neither my dad nor I borrowed any money.
Um, fast forward, uh, 20 years, my dad started to become very weak. My dad had a condition called Parkinson's disease. So, this is the man that taught me everything about personal finance. My dad traded options on his, uh, own personal account, so it's with a online brokerage firm. My dad started to lock himself out of his account. And the first, second time, I helped him reset his password, but by the time it got to be the third time, I had a conversation with my mom and my two sisters. And I determined, with my family, that it really was not in my best, dad's best interest to continue trading stocks.
See, my dad wanted me... "Hey, Rita, can you just reset my password again?" And at that time, I really did face an ethical dilemma. I didn't think it was appropriate. While I'm not a clinician, I can tell that my dad r- really should not be trading stocks. One wrong click, and he might click "buy" instead of "sell." So how my family handled this is we agreed that he should not have online trading capabilities, but dad still could log on and see his accounts. Now, while that might seem mean, "Rita, why can't you just give your dad what he wants?", it was truly in his best interests to protect the client from himself.
As part of the planning process, Cheng asks older clients if it’s OK to have other family members present at meetings and to receive duplicate statements. Having family members be involved in the conversation allows them to be part of the decision early on and support the guidance they receive, rather than second-guessing it later, Cheng says.
It’s best to deal with situations where clients might disagree with you, rather than dealing with it later. “It’s important to engage in meaningful dialogue,” she says
Retirement Plan Business
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