Ask the Ethicist

Dan Candura answers readers’ questions on the ethical dilemmas financial advisers face.

What to do when a disgruntled client still owes a financial planning fee

Is it wrong for a financial adviser to withhold the client's files until the invoice is paid?

May 5, 2016 @ 12:24 pm

By Dan Candura

This month's question comes from an adviser who has a tough client issue.

Q: I need your opinion about how to handle a disgruntled client who still owes me part of my planning fee.

The client is an elderly woman who came to me after trying to manage her situation on her own for several years. She agreed to pay me a quarterly fee, and I agreed to provide her with a retirement income plan and assistance managing her investment portfolio. This worked well for the first six months, but then something changed. The invoice for the third quarter was not paid, so I sent a reminder after 30 days. She didn't pay this invoice either. I called but didn't get an answer. This wasn't unusual since she doesn't keep her cell phone handy and she doesn't have a landline.

When a new quarter began I mailed another invoice showing the past due balance. This was ignored as well, so I called. This time I got through … briefly. After I identified myself, she told me she wasn't going to talk to me and ended the call. Perplexed, I called her back right away. This time she hung up immediately without saying a word. Two days later, I received an envelope from her with my last two invoices inside torn in pieces along with a note. The note instructed me to send all her files to her immediately.

I don't know why she is firing me, but my agreement clearly stated that upon termination accrued fees are payable. I think she owes me for one quarter and I don't want to send her any files since that appears to be my only leverage. Is it wrong for me to withhold her files until she pays my invoice?

A: It is never easy when a relationship ends. In this situation, I urge you to separate the payment issue from the records request.

It is not unreasonable for your client to ask for any original records in your possession, and these should be sent immediately. These are her records and you have no right to retain them or use them as leverage to force payment of a past-due balance. You should document which records you are returning, why you had them in your possession and how you used them to provide services to your client before you return them. I suggest that you inform your client that these are all the original documents and that you met her request. That may end the matter, but if she asks for your personal notes you may decline. You have no ethical requirement to turn over work product unless you are responding to a formal inquiry from your employer or a regulator. I also suggest you contact the compliance officer for your firm about the situation for their input and advice.

The payment issue is more challenging from an ethical standpoint. With her non-payment, your client sent you a message that she is dissatisfied with your service. Could you have done more to determine the reasons for this beyond a single missed call over a three-month period? You sent a notice for the next quarter before you identified the problem, and that appears to have made the problem worse. The torn-up invoices and hang-ups show how unhappy and angry your client is with your performance. I am not sure whether you can recover this client relationship or even if you would want to do so. I suggest you apologize for any misunderstandings and write off the debt. There is little to be gained from collecting the overdue fee, and it is likely to cause more tension and stress. Do the right thing and take the high road.

Dan Candura is founder of the education and consulting firm Candura Group. Write to him to submit a question. All submissions will be treated confidentially.

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