We all know that doctors risk losing their license to practice medicine if they engage in intimate relations with their patients, but what happens to investment or financial advisors when they get "involved" with clients? Short answer: don't do it! (Sorry folks).
There is a recent case in which an advisor was sued for losses in his client's account - the regular claims are made for breach of contract and negligence, but the particulars are far from garden variety. The client alleges particulars of their intimacy and that he cheated on her. The pleading is apparently quite detailed. Her pleading describes the emotional and financial expectations she formed as a result of her intimate relationship with him. She further pleads that she has evidence in the form of emails in which she expressed that while he used and deceived her in the relationship, he had become uncommunicative with her in respect of her portfolio. She alleges that he was in a “conflict of interest” and that he breached his fiduciary duty to her. It is well settled law that to determine whether a fiduciary relationship exists between an advisor and his client, a Court must consider five interrelated factors: vulnerability, trust, reliance, discretion and professional rules.
The advisor, and his firm, moved to strike the portions of the claim relating to the intimate relationship, but the judge denied the advisor and his dealer the relief sought because he found that the pleading of an alleged intimate relationship with her advisor during the time he was her advisor “relates to most, if not all, of the five factors.” His Honour goes on to say that this might even be material evidence at trial to the issue of quantum of damages ordered because of the central role played by the Know Your Client Rule in investment advice cases. The motion court judge goes further to say that “the trial Judge will have to hear evidence about the nature of the relationship.”
Know Your Client means understand them sufficiently to gauge their risk tolerance, time horizon, values, concerns and investment experience. You will recall that the standard of care required for advisors is the same as lawyers, doctors, dentists and accountants. This means that if your professional relationship with your client becomes so close that you might expose yourself to allegations of conflict of interest, even if the allegations have no merit, you will want to make other arrangements so that your risk is managed and personal exposure reduced.
So, advisors, when you stand under the mistletoe this holiday season, be certain that the other person is not your client!