Engagement Creep, an Undisclosed Referral Fee, and Missing Client Data
Maria Cristina Lim, 46, a regional sales director, engages you under a signed letter limited to retirement planning and her two children's education funding, for a fixed fee of PHP 80,000. At the discovery meeting she declines to disclose her husband's income, will not sign an authorization for their BIR returns, and tells you to 'just assume' PHP 70,000 a month of household expenses. Halfway through, she asks you to review a PHP 4.8 million pre-selling condominium contract she signs next week; the developer's broker has offered you 0.5% of the contract price for the referral. She also wants you to draft the deed of sale and choose the tax scheme for the rental income she expects from the unit. She holds PHP 900,000 in savings and PHP 1.2 million in a five-year VUL she does not understand. The engagement letter says nothing about referral compensation.
1. Identify the professional standards and fiduciary issues in the first half of this engagement and state what you must do before delivering any recommendation.
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The controlling issues are scope, competence, the quality of client information, and undisclosed conflicts.
Scope and competence. The letter covers retirement and education only. Reviewing a property purchase, drafting a deed, and electing a tax scheme are outside it and outside a planner's technical competence; doing them silently breaches the duty of care.
Client information. She refuses her husband's income and a BIR authorization. You cannot verify household spending, so 'just assume PHP 70,000' is her estimate, not data. The standard is to base advice on sufficient, reliable information and, where the client limits it, to disclose the limitation. Put a written data request in the file, record the refusal, run sensitivity on expenses at, say, PHP 55,000 / 70,000 / 90,000, and issue the plan expressly labelled as conditional and to be revisited when data arrives. Never let a signature imply you verified figures you did not see.
Conflicts. The letter is silent on third-party compensation. Before any recommendation, amend the letter to disclose how you are paid, and put the referral question to her in writing (see next task).
2. How should you handle the condominium review request and the 0.5% referral offer?
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Treat them separately, because one is a scope question and the other is a conflict.
Scope. Property acquisition review is a new deliverable. Decline it or issue a written addendum defining the deliverable, the separate fee, the deadline (she signs next week), and what you will and will not opine on.
Referral fee. PHP 24,000 from the seller's broker, contingent on a transaction you are being asked to evaluate objectively, is a material conflict. A planner must not accept undisclosed third-party compensation. Either decline it, or disclose it in writing before she decides, obtain her informed consent, and make clear the fee will not influence the recommendation. Never accept compensation contingent on the transaction closing.
Substance of the review. The unit is about a third of her investable assets, paid over the preselling period with turnover risk, and is highly illiquid; exit carries capital gains tax, documentary stamp tax, and broker commission. Stress-test the amortisation at higher rates, compare price with zonal and comparable values, and check developer track record. Given her savings, a smaller allocation or none is the defensible conclusion. Document the disclosure and the analysis in the file.
3. What is your response to the tax and deed-drafting request, and how do you close the file given the unverified data?
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Tax and legal work. Decline to draft the deed or to elect a tax scheme. Identify the issues for the client (capital gains tax and documentary stamp tax on sale, donor's tax if the transfer is a gift, rental income and expanded withholding, the VAT threshold) and refer her to a CPA-lawyer with her written consent, then integrate their conclusions into the plan. Referring is not abandoning the client; the planner stays accountable for how the tax outcome affects cash flow and goals.
Closing the file with data gaps. (1) Issue the plan with an assumptions page listing every unverified item and the sensitivity ranges used. (2) State in the transmittal letter that the retirement and education projections are conditional on the household expense figure and on the undisclosed spouse income. (3) Include the conflict disclosure, the referral decision, and the scope addendum. (4) Set a review trigger: a date, plus events such as signing the condominium or providing the BIR authority. (5) Note the VUL's surrender charges against liquidity needs before recommending any repositioning. (6) Keep the notes of her refusals and the addendum in the file; contemporaneous documentation is the defence if her expectations later diverge from the plan.