Mixing friends, family with business is a danger

Clyde Wyatt managed his father's money for about 18 months before he was abruptly dumped for another adviser: His own son Chris.

Clyde Wyatt managed his father’s money for about 18 months before he was abruptly dumped for another adviser: His own son Chris.

“One day my father was asking some questions about investment options for some maturing certificates of deposit while my son was with me,” recalled Mr. Wyatt, managing director of Navigation Financial Group, which manages $900 million in assets. “From that moment, I lost my father as my client and he has been working with my son since. My dad likes having his grandson as his adviser better. There’s no friction.”

Mr. Wyatt’s case shows that a family bond or close friendship doesn’t always translate to a solid client relationship. Since family members and friends can often demand more from advisers than their regular clients — or overstep the bounds of the business relationship — practice management experts agree there are some simple rules to consider when deciding whether to take them on as clients.

First, advisers need to keep their personal relationships and business relationships separate and clearly explain the limits to clients.

For example, advisers should make a rule that they won’t answer business calls on weekends or after hours unless it’s an emergency. They also should refuse to discuss investments or financial planning at social events or parties.

Of course, that’s easier said than done. Roger Streit, a certified financial planner of Key Financial Solutions LLC, which manages $10 million in assets, said he once made an exception in his rule not to take on family members or friends as clients. It was a disaster.

“I received phone calls at night and on weekends that were part social and part business,” he said. “I thought this person was imposing on me and a normal client wouldn’t do this. The business relationship ruined the personal relationship.”

Lauren Klein, an adviser whose firm, Klein Financial Advisors, has $25 million in assets under management, agreed that separating the personal from the business relationship can be dicey. “As an adviser you may think the new kitchen was a bad idea, but as a friend you think it’s just a beautiful kitchen.”

Another key recommendation: Clearly outline fees, and make sure they’re in line with those charged other customers, said Mark Schoenbeck, chief marketing officer and director of practice management for Genworth Financial Wealth Management Inc. Advisers might want to give a discount to relatives, but doing so could trigger a compliance issue, he said. “Regulators do scrutinize why you give these services for this fee.”

Advisers should make sure that the relative or friend fits the firm’s ideal client description, experts say. If an adviser takes on too many friends and relatives that aren’t right for the firm, he or she can end up wasting a lot of time on accounts that aren’t as profitable.

For his part, adviser Mike Foltz, a partner at Balasa Dinverno Foltz LLC, which manages $1.5 billion in assets, has turned down about half a dozen of his relatives because they didn’t meet the firm’s $1 million required minimum. He said, however, that he isn’t opposed to working with relatives or close friends and currently has several relatives as clients.

“You have to keep yourself tight-lipped about your own life,” he said. “You now have family members who are clients and they don’t want to hear anything negative. You have to be tight-lipped about anything that happens in the office.”

If the relative or friend isn’t a good fit with the adviser or the firm, the rep should help them find another planner, said Joni Youngwirth, managing principal of practice management at Commonwealth Financial Network. “I think the adviser has to honestly look within themselves and say, “Am I the right adviser for this family member or friend?’” she said. “The question is: “Would this person be my ideal client if they weren’t family?’”

Perhaps most importantly, advisers must consider the possibility that the business relationship could end up damaging the personal tie. Adviser Fred Amrein said he’s aware that most of his peers manage money for their relatives, but he’s decided to steer clear of such relationships at Amrein Financial, which manages $12 million in assets.

“It’s a conscious decision I made,” he said. “Money makes people change. Family relationships are important to me. If something goes wrong, I don’t want that risk and that tension in the family.”

Indeed, working with a relative can often end badly. In January, a woman and her husband won a $608,000 arbitration decision against their adviser — her brother — and his firm in a case that involved stock churning in the weeks leading up to the 2008 market collapse.

Three Financial Industry Regulatory Authority Inc. arbitrators awarded investors Diana Hojecki and her husband, James, $343,000 in compensatory damages, $15,000 in fees and $250,000 in punitive damages.

Also in January, Bradley Ruderman, the founder and manager of two Beverly Hills, Calif., hedge funds, was sentenced to more than 10 years in prison for cheating investors, including many family members, out of more than $25 million.

But despite the many challenges and potential drawbacks, many advisers say working with relatives is an important part of their business.

Thomas Muldowney of Savant Capital Management Inc. with $1.5 billion in assets, said a majority of the firm’s 60 advisers have family members as clients. He, for example, has counted his sister, Joyce Erb, as a client for the past 20 years. Now, his daughter, Libby Samuelson, a client services representative at the firm, also works with Ms. Erb.

Mr. Muldowney likes having family as clients. “They ask fewer questions,” he said.

James Barnash, a consultant with Stride Consulting Inc., which works with about 35 advisory firms, said he recommends that advisers aim to work with their close friends and relatives, despite the dangers.

“In the back of my mind, whenever someone says, “I don’t want to work with my family and friends,’ I think there’s obviously something in your relationship that I don’t understand. I would think family and friends would line up at the door.”

E-mail Lisa Shidler at [email protected].