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Getting Too Chummy With Clients Can Backfire

By Chris Latham April 9, 2014

Advisors commonly boast that their great relationships with clients have blossomed into genuine friendships. They understand one another’s values, break bread together, attend the same parties, even exchange small gifts to show their mutual appreciation. But think about it a minute — real friends rarely enter contractual obligations with each other involving hefty chunks of one party’s financial portfolio.

This raises the questions of just how close advisors should become with friendly clients, and what complications could befall such relationships. Experts agree it’s fine to get chummy, but strong boundaries can save both parties grief down the line.

One approach calls for advisor and prospect to like each other in the first place, before transitioning into an advisor-client relationship. That’s benefited Pence Wealth Management in Newport Beach, Calif., according to founders Laila Pence and Dryden Pence. The couple’s firm, which is affiliated with LPL Financial, manages over $1 billion.

“If you start with that, it’s not as awkward if they want to be your friend,” says Dryden Pence, speaking of their rule about liking clients from the start. “That way everyone has to be respectful of each other’s time and respectful of the business relationship.” While this husband-and-wife team will dine together with client couples and attend a client’s wedding or birthday party, they draw the line at hitting a bar one-on-one with a client, because such get-togethers aren’t generally productive.

Private Matters

Nevertheless, Laila Pence has found herself steering clients through intimate decisions typically reserved for friends. For example, 12 years ago a client asked her whether he and his wife should have a third child. Just the other day, another client sought her guidance on how to ask his daughter-in-law what religion his grandson would be raised in. And women clients have been known to ask her for dating advice. The advisor says she feels honored to be so trusted, but she answers diplomatically, helping clients think situations through rather than deciding for them. “A client can become a friend, but there’s always a limit to how much of a friend they can become,” says Laila Pence.

If a friendly relationship with a client becomes too intense, advisors must be prepared to sever ties altogether, according to Drew Horter, who runs Horter Investment Management in Cincinnati, Ohio.

Horter recalls a painful falling-out more than a decade ago. The head of a major corporation, who had been a client for over five years, began to invite Horter to gatherings at resorts and championship sporting events that required flying around the country. By this time Horter also had started doing advisory work for the man’s adult children. Though the client wanted a pal, the advisor wasn’t as thrilled. Not only was it hindering Horter’s ability to serve other clients, but it also had nothing to do with his stated role of managing the client’s trust funds and charitable donations.

After a few outings, Horter told the client they were moving in different directions and the advisor needed to focus on growing his practice. Although he insisted there was no offense intended, the client did feel affronted. Their business relationship ended, along with the work Horter was doing for the man’s children. The experience taught Horter, whose firm manages $810 million, that keeping clients at arm’s length is likelier to ensure that he continues to command their respect.

Barbara Shapiro of HMS Financial Group in Dedham, Mass., understands why clients want to befriend their financial advisors. When clients go to a therapist, the therapist rarely gives straight answers; advisors are more direct. That creates a feeling of closeness, argues Shapiro, whose firm manages more than $100 million.

Being able to differentiate genuine friends from friendly clients saves advisors from stressful encounters, she adds. So when clients invite her to connect on LinkedIn or Facebook, Shapiro accepts, but she does not post anything on clients’ social media pages. Similarly, when a woman gave her a bottle of wine the other day, Shapiro accepted, since the client had just returned with it from Italy. But they didn’t pop the cork in her office. “It’s my responsibility to put up that subtle wall, like a separation of church and state,” Shapiro says.