Last May, the giant Swiss bank Credit Suisse pleaded guilty to helping American taxpayers file false income tax returns. As of November, at least 25 asset managers, bankers and lawyers had been charged by U.S. authorities with enabling the fraud, according to Reuters. If found guilty, they may face steep fines or several years in prison.
Could that be you one day? Probably not. Most financial advisors would refuse to aid and abet a client in breaking the law. But sometimes the situation isn't so clear-cut.
Suppose you're merely asked to turn a blind eye to wrongdoing? Or the client requests your help with something that probably isn't illegal, but might be unethical or immoral? Suppose further that the client is someone whose assets, along with the investments of friends he has referred to you, are responsible for a significant part of your income. Do you know how you'd respond? Do your clients know it, too?
WHEN ARE YOU LIABLE?
Any financial professional who assists or encourages a client's actionable behavior could face repercussions from a regulator and may be liable under criminal or civil law, warned Thomas Giachetti, J.D., chairman of the Securities Practice Group at law firm Stark & Stark in Lawrenceville, New Jersey. That could include an accountant who knowingly signs off on a client's padded expenses, an insurance agent who agrees to exaggerate a property claim or an investment advisor who allows a non-accredited client access to risky markets.
A former investment banker and NASD-registered representative who also serves as Investment Advisor's Compliance Coach columnist (see "Fight Back Against 'Aggressive' Exams" to see the latest Compliance Coach article), Giachetti represents investment advisors, financial planners, broker-dealers, investment companies, CPA firms and registered representatives. "If you believe a client is knowingly asking you to circumvent the law, you should not participate," he said bluntly. "Either resign, or advise the client in writing of your concern and seek proper legal or other professional counsel for a definitive opinion."
A murkier challenge that advisors often face is a client's demand to make a questionable investment. "I've heard this guy Madoff is earning fabulous returns for investors," the client may say. "Let's get in before everybody else does." Assuming you've heard a rumor of iffy practices at Madoff Investment Securities but have no proof, are you liable if you accede to the client's demand?
Watch out, Giachetti cautioned. It's better to reply (ideally in writing), "I have an obligation to make sure that when I give you advice, it is sound advice. And I can't recommend this." Allow your fiduciary responsibility to protect you as well as your client.
In today's highly sophisticated financial marketplace, another risk is that a client will ask you to assist in something that may be illegal, but you lack the expertise to know for sure. The safest course, Giachetti said, is to put the client on notice that the planned action is suspect and recommend that he consult an expert. Above all, be sure to document your advice in writing. You might be "well-served to resign," he added.
REPUTATION VERSUS REALITY
Although trust in the financial sector ranks low in public polls, most financial advisors maintain a strong ethical standard. "The thing we value most in this business, and especially in a small community, is our reputation," said former NAPFA Chair Susan MacMichael John, founder and president of Financial Focus in Wolfeboro, New Hampshire. "There are enough people in the world willing to compromise here or there. I am not one of them. If one of my staff were to do or suggest something to a client that was not 100% legal and appropriate, that person would no longer have a job."
One measure of morality is that only 3% of advisors receive serious complaints during their entire career. That compares to complaints against an average 8% of attorneys and 5% of doctors every year, according to former Wall Street Journal Investing Editor Larry Light.
However, burgeoning regulatory complexity means more laws for even ethical advisors to trip over, noted longtime business ethics educator and author Ronald Duska, co-founder of The American College's Center for Ethics and now a consultant in Villanova, Pennsylvania. As the rules become more complicated, schemes to game the system become correspondingly more ingenious. "None of us are angels," Duska pointed out. "You can pass more and more laws, but people will find a way around them."
REMEMBER WHAT MOM SAID
The basis of ethical behavior is seeing that some things are just wrong. "The usual excuse is that 'Everybody else does it,'" said Duska, who has also served as executive director of the Society of Business Ethics. "But remember what your mother used to say: 'If everyone else was jumping off a bridge, would you do it, too?'"
Duska is a fan of the late Dr. Solomon Huebner, founder of The American College of Life Underwriters (now The American College), who stressed that "character is the pedestal on which everything else is based. Just blacken your character and you'll never hear the end of it." Duska has conveyed that message in decades of teaching applied ethics, medical ethics, business ethics and most recently financial ethics, with an emphasis on the life insurance industry.
Can ethics really be learned? It's a fair question, considering that years of media exposés have trained younger generations to believe that everyone cheats, from the corridors of power to the playing field. Certified Financial Planner, Chartered Financial Analyst, Chartered Financial Consultant and Chartered Life Underwriter programs, among others, require certificants or charter applicants to complete ethical training.
Most of these programs are well-grounded in legal issues, Duska said. But as an ethics educator, he recognizes that it's more difficult to teach morality than legality. For every black-and-white issue, many others fall into gray areas. So instead of trying to prepare students for every eventuality, he takes the position that "I'm going to help you develop procedures to evaluate ethical issues. What you decide to do is up to you." (See sidebar, "Three Rules of Moral Behavior." )
BLOWING THE WHISTLE
Can you avoid liability by turning a blind eye to a client's plan? Don't count on it, advised Stark & Stark's Giachetti. "If you ignore a client's wrongdoing for purposes of economic benefit to yourself, you place yourself in a precarious position with regulators," he said.
Duska pointed out that you may actually have a responsibility to step in. First, there must be a need: Some preventable harm is about to occur. Second, you must be capable of preventing it. Third, you must be in proximity, i.e., close by. Fourth, you are the last resort. In other words, he said, no one else is around or higher-ups who have the primary responsibility are not acting to prevent harm from occurring. Then the obligation falls on you.
Let's say you try your best to dissuade the client from an illegal course of action, but he or she still plans to pursue it. Are you legally required to notify authorities?
No, Giachetti said. But based on extensive experience with compliance cases, he added that the advisor "should immediately put his or her position in writing to the client and advise the client to seek counsel. It is prudent to terminate your engagement."
