Is it possible for clients to
trust their financial advisers too much?
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On the face of it, one would think not. After all, people in the industry often claim their goal is to become their client's one, true, trusted adviser. Must be OK, right?
But what happens when a client becomes so trusting that the adviser becomes the executor of their estate and is given power of attorney over their financial affairs? Or, even worse, is named a beneficiary in the client's will?
Sounds like a recipe for disaster — or at least a potential disaster — and that is why the
Financial Industry Regulatory Authority Inc. earlier this month proposed a rule to limit such practices. The rule would require registered reps to get prior approval from their broker-dealers to become their client's beneficiary, executor or trustee, or to assume power of attorney.
The financial advice industry is rife with potential conflicts of interest. After all, in a business where one of the main compensation models is based on taking a percentage of a client's assets each year, that is bound to happen. One major firm even touts that message in its television ads: "We do better when you do better."
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And that is why Finra is concerned. Having too much control or a personal stake in a client's finances is one big red flag, and Finra wants broker-dealers to be on the alert. The proposed rule is especially timely given the large numbers of baby boomers who will be moving into advanced age for the forseeable future
"Given the potential conflicts of interest, Finra would expect a member firm to employ heightened scrutiny in assessing a registered person's request to be named a beneficiary of, or receive a bequest from a customer's estate," reads the proposal. "Approval should be given only when the member firm has made a reasonable determination that the registered person assuming such status does not present a risk of financial exploitation that the proposed rule is designed to address."
Finra's concern is grounded in history. Unfortunately, one can easily find too many examples of brokers who have abused their positions of trust after having been named trustees and beneficiaries by their customers.
While Finra's recognition of the problem is laudable, it's solution is not, simply because it does not go far enough. An outright ban on brokers serving in these kinds of roles would be better.
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First of all, why should a broker or adviser ever think it's OK to be a beneficiary in a client's will? The conflict of interest inherent in knowing that one would receive a portion of a client's estate should be reason enough to politely decline such an arrangement, if offered. Even if an adviser only finds out after a client's death that he or she has been named in the will as a beneficiary, the ethical course of action would be to decline such a gift.
A stronger case might be made for being named a trustee or executor. In the case of an elderly client who has no known relatives, it might seem preferable or even justified for an adviser to assume those positions. However, even here, potential conflicts of interest argue against serving in such capacities.
Finra CEO Robert Cook rightly points out that a lot of firms already have policies about brokers serving in official positions of trust with clients. However, as with this proposed rule, such policies often only require disclosure on the part of the broker and approval on the part of the firm.
If firms want to steer clear of trouble, they would be better off banning the practice outright, and telling Finra that it should do the same.
