COMPLY-Brokers can go too far when involved in client estates
Oct 3 (Reuters) - Tending to a client's estate may seem like a logical shift for a securities broker, especially after a decades-long role as their trusted financial adviser. But the move could lead to a slew of trouble for brokers, including the wrath of regulators and getting fired.
There is good reason for concern. The Financial Industry Regulatory Authority (FINRA), Wall Street's industry-funded watchdog, issued disciplinary orders against 18 brokers this year involving brokers who were named trustees, executors and even beneficiaries by clients, according to a spokeswoman.
Most of the brokers were suspended and fined. Their public records are now permanently branded with ugly disclosures about the incidents.
The actual number of violations is likely to be much higher, say securities lawyers, since such arrangements often do not surface until after the client dies and estate beneficiaries or surviving family members complain.
Major brokerage firms typically prohibit the practices because, among other things, they can easily lead to conflicts of interest. A trustee, for example, who also happens to be the trust account's broker, could potentially make decisions based on which commissions are more lucrative, instead of what is in the trust's best interest.
Some brokerages, such as Bank of America Corp's Merrill Lynch unit, make limited exceptions in cases in which clients are immediate family members, a spokesman said. Brokers who get in trouble with FINRA have typically ignored the rules and failed to disclose estate-related activities with clients to their firms, according to a review of disciplinary cases.
In one extreme example, a broker in Naples, Florida, was fired in 2010 by Stifel, Nicolaus & Co Inc, a Missouri-based brokerage, then censured last month by FINRA because of trust-related activities. He failed to tell Stifel and a previous firm for which he worked that five clients named him as a trustee to oversee their trusts, and that some of them had also named him as a beneficiary, according to regulatory documents. None of the clients were family members, said FINRA.
On Sept. 25, FINRA suspended the broker, Robert Gesdorf, for 60 days and fined him $30,000 because of the conduct, according to a settlement. Gesdorf - whom FINRA says inherited $1.7 million in 2009 along with his wife as co-beneficiaries for one such trust - is now a broker at a Moors & Cabot branch in Naples. He has neither admitted nor denied FINRA's allegations, according to the settlement.
Gesdorf declined to comment, saying he had to speak with his firm's compliance department. Officials from Stifel and Moors & Cabot did not return calls seeking comment.
There are good reasons for prohibiting brokers from getting entangled in clients' estates, said Lou Spadafora, a securities lawyer in New York. The arrangements are often viewed as self-dealing by brokers, who stand to rake in money from fees they earn as trustees, commissions they earn from trading trust accounts, or windfalls when clients die.
Brokers expose themselves and their firms to potential lawsuits, alleging everything from engaging in self-dealing to taking advantage of elderly customers. Brokers who act as trustees, even with the best of intentions, could also face legal consequences for not acting in the best interests of the trusts or their beneficiaries, Spadafora said.
That would be on top of potential regulatory penalties from FINRA.
Firms can also be on the hook for not properly supervising brokers involved in clients' estates.
"It's a dangerous area to play in," Spadafora said. Brokers who agree to such arrangements "are putting the crosshairs on their own backs," he said.
It is not uncommon for clients to ask a longstanding adviser to play a role in managing their estates, says Matthew Farley, a New York-based lawyer who advises brokerages on regulatory issues.
A decades-long relationship often extend beyond money matters into family friendships and socializing, Farley said. Often, their clients are elderly and alone.
Putting a trusted adviser in charge of an estate - and even leaving the adviser a token gift - seem logical to those clients, Farley said. But even the most well-intentioned and honest arrangements can work to a broker's disadvantage, Farley said.
Brokers who genuinely want to serve or who are unable to convince clients not to name them as beneficiaries should disclose the situation to their firms and ask whether another broker can take charge of the account, said Curtis Carlson, a lawyer in Miami, who represents both investors and brokers.
"The broker should want to step aside," Carlson said. Even then, firms that may be receptive to the arrangement should take steps to ensure the client understands the decision, he said.
GOING TOO FAR
There are instances in which brokers cross the line, said Carlson. Some brokers may convince elderly clients to name them as trustees or beneficiaries in order to reap financial benefits, he said.
While the FINRA action against Gesdorf, the broker in Naples, Florida, does not shed light on his intentions, the facts in the case have raised eyebrows among lawyers.
In all, Gesdorf failed to make 13 separate disclosures in annual compliance questionnaires that he was named by five different clients - some as old as 90 - for various roles in their estates, including being an alternate trustee, according to FINRA.
"The fact that it was never disclosed was a pretty good indication that it never passed the sniff test," said Carlson.
Gesdorf, who advised some of the clients for more than 20 years, told FINRA he was unaware that one client named him as an alternate trustee, according to the settlement document.
Nonetheless, he did not disclose that he and his family also received at least $30,300 in gifts from clients, FINRA said. Gesdorf also stands to inherit $2 million from one client's estate, in addition to other lucrative bequests, according to FINRA.