Form-of-the-Week:

Disclosure of a Conflict of Interest and Affiliated Business Arrangement — Forms 527 and 519/205

Professional relationships compromised

When a broker or their agent, acting on behalf of a client, has a competing professional or personal bias which might hinder their ability to fulfill the fiduciary duties they have undertaken by acting on behalf of the client, a conflict of interest arises.

In a professional relationship, a broker’s financial objective of soliciting and receiving compensation for services rendered as disclosed is not a conflict of interest. It is an exchange of known quantities — brokerage services and the receipt of an agreed fee or fees, regardless of the source of the fee(s) generated due to the client’s transaction.

Whether the broker or their agents represent a buyer or seller, the client is entitled to know the exact amount of all compensation the broker expects to or will receive arising out of any aspect of the employment relationship.

Thus, fees and benefits derived from other sources and arising out of the client’s transaction are to be disclosed to the client. These include expectation of fees or benefits in situations like:

  • professional courtesies such as referrals made by the broker or their agents;
  • familial favors due to direct or indirect involvement of a relative of the broker or any of their agents in the client’s transaction; and
  • preferential treatment having monetary value and given by others to the broker or agent. [See RPI Form 119]

In contrast to brokerage fees, a conflict of interest addresses a broker’s or agent’s personal relationships with others that are potentially at odds with the agency duty of care and protection owed the client. Thus, a conflict of interest creates a fundamental agency dilemma — it is not a matter of compensation or business referral income.

Editor’s note — The referral of a client to a financially controlled business owned or co-owned by the broker or others in their office is a financial benefit from a transaction disclosed by use of an affiliated business arrangement (ABA) disclosure. The affiliated business arrangement is discussed in greater detail later in the article. [See RPI Form 519 and 205]

Unless disclosed and the client has given their consent, an undisclosed conflict of interest is a breach of the broker’s fiduciary duty of good faith, fair dealing and trust owed to the client when the broker continues to act on the client’s behalf after the conflict of interest became known to the broker or their agent.

Related video:

Analyzing a Conflict of Interest

Conflicts abound in everyday brokerage situations
To disclose or not to disclose?
Preparing the Conflict of Interest Disclosure
A profit to be taken, not a referral fee
Analyzing the Affiliated Business Arrangement Disclosure Statement

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