We love doing business with people we trust, and our family and friends are the people we tend to trust the most. When it comes to doing business, particularly if it is work that is sensitive and requires a high degree of trust, it makes sense that we would gravitate toward a family member, a personal friend, or a referral of someone from one of these sources to do business. There are a number of benefits to doing business with people you feel you know – you may feel more open to talk about sensitive issues, and it feels good to help someone you know by giving them your business. I freely admit that I have done business with family and friends and likely will continue to do so. It can be a tremendous relationship.
However, when you consider working with someone where you have a personal relationship, you have to keep in mind that a personal relationship and a business relationship are two different things. In a business relationship, you are paying to have a product sold to you, a task performed, or perhaps a combination of both. The consequences of the decision you are needing to make, they could have large ramifications. Are you buying a vehicle from this person, one you will be driving for several years? Are you buying a home and looking at something that not only is a significant financial asset and liability, but something your family will be living in day in and day out for many years? Are you thinking about protecting yourself financially with insurance, or seeking financial planning and investment advice, all with decisions that can have enormous consequences with your financial health and future plans?
There are a number of business relationships where I commonly see family brought in to serve, and the results are not always glorious. When you choose to work with someone who is a family member or a friend, it is important to set clear expectations for the relationship. You need to make sure you will receive as great of service as every other client they have, and that you are not compromising financial protections that would be afforded to you in a different relationship. Here are three common relationships where family is brought in:
Financial planner/insurance. There are a number of personal and potentially sensitive topics that surround this area, so it may feel more comfortable talking to someone who you feel knows you. However, how they structure their business and make recommendations can have a serious, negative impact on your finances that leave you little or no legal recourse.
Are they a fee-only, fiduciary financial planner? (most are not) Will they put that in writing? If they say they’ll act in your best interests, but will NOT agree to a fiduciary level of responsibility, then they are NOT a fiduciary. If they won’t do this, you are potentially sacrificing a level of service and legal protections afforded to you by advisors that work that way.
How is the family member earning their money? Is it based on sales commissions, an advisory fee, or both? Are there conflicts of interest (usually yes), and if so, how can you be sure they are acting professionally and in your best interests?