When a client asks their advisor to place an investment trade or execute another planning action, it typically comes as a result of a consultation with the advisor (and often reflects the advisor’s recommended course of action). However, sometimes a client might request that the advisor take an action the advisor believes isn’t in the client’s best interests (e.g., moving their entire portfolio to cash amidst a market downturn). Which can create a delicate situation, not only with regard to the client’s financial wellbeing and compliance issues, but also for the future of the advisor-client relationship.
The Securities and Exchange Commission’s (SEC’s) 2019 interpretation of the standard of conduct for investment advisers under the Advisers Act highlights that investment advisers and clients have a principal-agent relationship, under which an agent (in this case the advisor) has a duty to follow the lawful instructions of the principal (here, their client). Similarly, CFP Board’s definition of a fiduciary, a CFP professional has a duty to follow instructions (along with a duties of care and loyalty), which includes complying with all reasonable and lawful directions of their client.
Amidst this backdrop, an advisor considering a client request that they believe isn’t in the client’s best interest is required to follow through on it as long as they determine that the client is able to make decisions for themselves (e.g., isn’t showing signs of mental incapacity) and the request is lawful (e.g., they have the authority to make trades on the account in question).
That said, advisors can still first offer their recommendation, based on their professional judgment, that the client not follow through with their request, and perhaps pause before making a rash and impactful decision (fulfilling the advisor’s duty of care), as well as confirm that the client is making a direct request and isn’t merely expressing frustration (which could avoid a costly misunderstanding). Also, documenting the conversation and the final decision made can create a record describing both the client’s request and the advisor’s response to help mitigate against misunderstandings down the line (and could include an “Against Advisor’s Advice” letter signed by the client acknowledging they directed their advisor to implement an action that the advisor did not recommend or outright recommended against).
While stopping at this point would fulfill the advisor’s duty to follow the client’s instructions, this scenario also raises the question of whether the advisor wants to continue their relationship with the client. For instance, a client instruction to move their entire portfolio to cash could call for a reassessment of the client’s risk tolerance and investment policy statement. Going a step further, an advisor who fields regular trading requests from clients (against the advisor’s advice) might prefer to change the scope of their engagement with the client to be planning only. And if an advisor feels their relationship with their client has become particularly misaligned, they might choose to terminate the engagement altogether.
Ultimately, the key point is that a situation where a client makes a request against their advisor’s recommendation presents two questions: whether the advisor must comply with the instruction and whether the advisor wants to continue the relationship under its current terms. By separating these questions, advisors can make decisions regarding the request in line with relevant compliance requirements and whether the relationship with the client is likely to be productive going forward.
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