Ask the Ethicist

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

What advisers need to consider before starting a separate business venture

There are some ethical considerations that deserve some thought before launching a non-financial planning business

Aug 3, 2016 @ 1:17 pm

By Dan Candura

This month's question comes from an adviser who isn't sure whether starting another business venture distinct from his planning practice prompts any ethical problems.

Q: My financial planning practice is thriving. Each year sees 15% to 20% growth in revenue, even after adding additional staff. I received an award from my broker-dealer at our last national conference, and they invited me to speak at the next one. For the past few years, I set aside some of my profits for future opportunities. My brother-in-law approached me about investing in some income properties. He has been doing this over the last few years and wants to partner with me to show me the ropes. Are there any ethical implications of launching this separate and distinct business while still maintaining my financial planning practice?

A: Congratulations on your success. There are some ethical considerations that deserve some thought and will require you to clear some hurdles before you launch this real estate venture.

First, your broker-dealer will need to approve this outside business activity. This goes beyond just notifying them on the annual “Outside Business Activity” form required by your compliance department. Your B-D must be sure that your budding real estate empire will not detract from your abilities to serve your clients. This goes beyond notification and requires approval by your compliance supervisors. Be prepared to share the details of the partnership and your expected level of activity as a partner.

Next, if you are an investment adviser representative of your B-D's registered investment adviser entity, or if you operate your own RIA, it is likely that your ADV part two will retire some attention as well. This document includes a section for “other business activities” and will need to be updated with a description of your real estate activities. This update should not wait until the annual update schedule after year end but should be done as soon as possible after you enter the partnership with your brother-in-law (assuming your B-D approves). Ask your compliance department whether information about your partner needs to be included as part of the description.

Finally, consider carefully whether you will accept any clients as tenants, as this would be a substantial conflict of interest and difficult to mitigate. As their investment adviser and landlord, your tenants could feel pressured to purchase or hold investments to avoid possible rent increases or other retaliation. Acting in the client's best interest is more difficult when simultaneously acting as their landlord. For example, if a client-tenant is behind on rent after being laid off from his job would you advise surrendering investment assets or begin eviction proceedings? It is likely that your B-D will make a “no clients as tenants” rule a condition of their approval. This would apply to existing and future clients.

Tread carefully when making this decision. Your financial planning practice is thriving, and you should be careful not to jeopardize it by dividing your attention to another enterprise that's likely to add ethical challenges as well.

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.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Joe Duran: How to compete in a technologically changing world

The CEO of United Capital explains why advisers should have a strong presence on smartphones, make the most of video capabilities and go "bionic" to free themselves from time-consuming chores.

Latest news & opinion

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.

PIABA accuses Finra of conflicts of interest

Public Investors Arbitration Bar Association report slams self-regulator over its picks for board of governors.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print