Financial advisers may be encouraged to work with multiple generations amid the intergenerational wealth transfer, but the Financial Advice Association Australia (FAAA) has warned it can cause behavioural conflicts.
Speaking on a webinar with Acenda, Phil Anderson, general manager for policy, advocacy and standards at the FAAA, said conflict can often arise between generations.
Earlier this month, Money Management covered how wealth managers are nervous of the “flight risk” of next-gen clients who depart. Some 81 per cent of these next-generation high-net-worth individuals said they will switch away from their parent’s wealth manager within one to two years of receiving said inheritance, according to Capgemini.
As a result, firms are trying to build relationships with these younger clients while their parents are alive in the hope of retaining them as a client.
But Anderson said this can put advisers in the difficult position, from an ethical perspective, as to which party they are acting for if the parent and child disagree.
Standard 2 of the Code of the Ethics states an adviser must act with integrity and in the best interest of each of your clients, while Standard 3 states they must not advise in a matter where they have a conflict of interest or duty.
Anderson said: “There is a tendency to want to retain clients after a death, but there are natural conflicts of interest there. Kids typically have an impatience around inheritance, and that is a conflict of duty when advising multiple generations.
“You need to make sure that you are acting in the best interest of your client in that meeting and know very clearly who your client is if you’re sitting in front of multiple parties. They may all be your clients but, for that meeting, you have to be very clear who you have a duty towards. You can’t do anything that goes against their best interest, especially if that’s a parent.
“If the parents are willing to give some money as a gift to their children and seek your help, then you can help them with that, but you shouldn’t initiate it or be an advocate for the children.”
Research by Fidelity has found two in five individuals aged under 59 expect to receive an inheritance in the future, and half believe it will be greater than $200,000 which will subsequently be used to pay off debts, buy a home, or support family.
As a result, there is a possibility conflict could occur if an adviser feels an older client is being abused or manipulated by their children in a bid to obtain an inheritance. If the situation worsens, this could be a barrier to continuing the relationship.
Anderson clarified: “You need to determine if you can provide that service to multiple generations. It is possible, but you will likely run into scenarios when the behaviour of certain individuals means you can no longer do so. If the children are applying pressure by manipulating their parents, withholding access to grandchildren, or via elder abuse, then that is a sign you can no longer advise both parties.
“It is a challenging space, but advisers should be able to rely on their professional judgement based on their ethics and values, and extend that to how they believe their clients should behave appropriately.”
