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How Brokers Violate Client Trust



Some might consider financial advisors holding a personal stake in a client’s finances normal. After all, the industry players often claim their primary goal is to become their client’s one, true, trusted advisor. However, this tangled arrangement comes with huge risks for unsuspecting clients.

Ever wondered what happens when a client nominates the advisor to becomes the executor of their estate and is given power of attorney over their financial affairs? Or, even worse, if named a beneficiary in the client’s will?

FINRA Aims to Restrict Reps from Violating Client Trust

This form of arrangement poses an imminent risk and this motivated the proposed rule to limit such practices by the Financial Industry Regulatory Authority Inc (FINRA) later in 2019. 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 advisory industry is riddled with potential conflicts of interest. After all, they are compensation based models, taking a percentage of a client’s assets each year, thus; that is bound to happen. One major firm even touts that message in its television ads: “We do better, when you do better.”

FINRA Proposal to Curb Risk of Financial Exploitation

Amassing too much control or a personal stake in a client’s finances is a big red flag, and FINRA cautioned broker-dealers to be on the alert to avoid broker misconduct. “Given the potential conflicts of interest, FINRA would expect a member firm to employ heightened scrutiny in assessing a Broker’s/Advisor’s request to be named a beneficiary of, or receive a bequest from a customer’s estate”, in its proposal. “Approval should be granted only when the Member firm has made a reasonable determination that the Broker/Advisor assuming such status does not present a risk of financial exploitation that the proposed rule is designed to address.” Thereby curbing the menace of Investment fraud and broker misconduct.

FINRA’s concern is grounded in history. Unfortunately, one can easily find too many examples of Brokers/Advisors who have abused their positions of trust after having been named trustees and beneficiaries of clients.

FINRA Falls Short of Ban on Advisor Conflicts of Interest

While FINRA’s recognition of the problem is laudable, its solution seems not to be sufficient deterrence. An outright ban on Brokers/Advisors serving in these kinds of roles would appropriate in order to curb financial fraud or misconduct once and for all.

First of all, why should a Broker or Advisor ever consider ethical, being a beneficiary in a client’s Will? The conflict of interest inherent with the knowledge 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 they only find 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 justified for an Advisor/Broker to assume such positions. However, even in such cases, potential conflicts of interest argue against serving in such capacities.

FINRA’ President, Robert Cook rightly opined that a lot of firms already have policies about Brokers/Advisors 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 Brokers/Advisors and approval on the part of the firm.

Pennsylvania & New Jersey Securities Law Firm

If you or someone you know has been the victim of broker misconduct or investment fraud, please contact our securities attorneys immediately for a free consultation toll-free at 215-462-3330 or by using our online contact form.

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