Imagine you’ve just wrapped up a meeting with a financial advisor you’ve decided to hire. You’ve shared your most intimate financial details with this advisor, including how much you make, how much you owe on your mortgage, and all the particulars about your impending divorce settlement. Your new potential advisor now knows how much money you really have in the bank. Later it dawns on you that you never asked to keep your personal story confidential, you simply assumed your conversation was private. Now you’re worried. Who else will see these details? Everyone knows about attorney/client privilege, which protects the privacy of communications between lawyers and their clients. What about financial advisors?
The Securities and Exchange Commission’s (SEC) Regulation S-P requires independent registered investment advisors as well as brokers working at broker-dealers to keep financial information ‘secure’ and to provide a ‘privacy notice’ to clients. By law, both the brokerage advisors and independents must tell clients what information they gather, how they use it, and who they share it with. But those regulations are designed primarily to safeguard customer records against identity theft. There’s no specific language about keeping your personal business secret as would be the case with an attorney. You may be surprised to learn that at brokerage firms, especially those owned by banks, clients’ financial details are routinely shared with their banking partners to generate cross-selling opportunities for either the broker or the bank.
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The degree of privacy you can expect from your individual advisor comes down to that advisor’s firm, and to some extent may be related to which standard of conduct the advisor’s firm follows. Two different standards govern advisor practices and behavior. Brokerage firms follow a ‘suitability standard’ and have fewer restrictions relating to how they sell investments to their clients, compared to independent advisory firms that don’t sell investments but offer advice for a fee, and are held to a higher ‘fiduciary standard.’ The fiduciary standard is a higher bar because it demands those advisors act in their clients’ best interest which provides a stricter overarching ethical framework. Still, there’s nothing specific or binding about advisor-client confidentiality.
What about all those professional advisor credentials? There are dozens of different advisor designations, and each has its own code of conduct but no demand that advisors follow one standardized set of rules. Kendrick Mattox, an independent investment advisor in Charlotte, N.C., for example, is both a Chartered Financial Analyst (CFA) and a Certified Financial Planner (CFP). Both designations have rigorous academic requirements as well as codes of ethics that deal with confidentiality issues. The CFA standard of professional conduct policy requires CFAs to keep information about current, former and prospective clients confidential unless it concerns illegal activities, or the disclosure is required by law, or the client or prospective client permits the disclosure of the information.
The CFP Board mentioned confidentiality of client information briefly in its standards of professional conduct in the past, then recently strengthened its code of ethics to include much more detailed confidentiality requirements – now prohibiting disclosure of non-public personal information about any prospective, current or former client except in a list of specific situations. But how does the CFP Board deal with advisors who breach those rules? The advisor may have the CFP designation suspended or revoked, but they may still be able to stay in business. This is why Mattox says it’s important to get the advisory firm’s own client confidentiality policy in writing.
He says his firm takes confidentially seriously and has its own standards beyond the SEC’s requirements. “That’s always been so strict for us, and it’s always been reinforced – both to advisors and to other people at our firm who might not work with people as much” meaning the back office staff, who have access to a lot of personal financial information, even if they aren’t dealing with the clients face to face.
Still, even with strict confidentiality rules, what happens to the advisor who violates those rules, what are the penalties? If the firm requires advisors to sign a confidentiality agreement as part of their employment contract and they break that agreement, the employer may be able to sue them or issue a cease and desist order.
Tom Geraghty, a partner at Stonegate Wealth Management an independent advisory firm in Cary, N.C., is both a CPA and CFP and says he’s subject to several layers of confidentiality. “I’m acting in the best interest of my clients, and everything is transparent,” he says. When doing estate planning work, he sends a memo to the client’s attorney so it is subject to the additional privacy level of attorney/client privilege. He says he had to be especially careful about confidentiality when he was a forensic accountant and a divorce mediator.
When he starts working with a client, he sends a letter explaining the firm’s confidentiality requirements – that all information clients provide will be kept strictly confidential, and that he would need to get their confirmation before discussing anything with a third party (such as a lawyer).
The take-away: confidentiality has to be a conversation you have with an advisor at the start of the relationship. It’s essential to ask under what circumstances they’re allowed to share personal information internally or outside the firm, what authorization they would need, and what happens to them if they break those rules.
If privacy is important to you, ask the advisor for a written notice explaining the firm’s rules, as well as the consequences if they don’t follow them.