What Were They Thinking?
These sorts of episodes are the stuff that keeps advisory firms’ compliance officers up at night. Most firms— mindful of the legal and regulatory guardrails imposed by the Financial Industry Regulatory Authority, the SEC and various state regulators— ban or sharply limit advisors from acting as a client’ s power of attorney, trustee, or executor or working in a similar position of trust, allowing only narrow, preapproved exceptions. Yet some advisors choose to take the risk despite the possibility of serious repercussions for themselves and their firms. For advisors stepping into those positions of trust, the road is narrow indeed: Strict protocols must be adhered to by both firm and advisor.
What makes some advisors step into this regulatory and legal vise— not to mention stepping into roles for which they’ re not trained? One simple answer is that clients ask them to, and advisors have a hard time saying no.“ They don’ t want to disrupt the relationship,” says Wilmott. In many cases, the functions they will be asked to take on in those roles are a fuzzy, future abstraction, so advisors who harbor doubts figure they can find a way to step aside later, she adds. Furthermore, the request may come from clients without long to live, adding to the pressure.
Business considerations might also color an advisor’ s judgement. Suppose a big client is making plans to turn their fortune over to their family. If you agree to step in as executor,“ you have the first shot at converting those family members [ to clients ],” says Daniel Bernstein, a chief counsel in regulatory issues at Hamburger Law Firm.
Some advisors also feel exceptions are allowable for family members.“ It would only be OK if the advisor is a family member, such as a spouse or parent or adult child of a parent,” says Allan Moskowitz, principal at Transformative Wealth Management in El Cerrito, Calif.“ Otherwise, it is a conflict of interest.”
A Gauntlet Of Rules
One need not look far to find positionof-trust situations gone awry. In 2024, Stifel, Nicolaus & Company reached a settlement after Finra accused it of failing to establish an adequate system to monitor the moving of a client’ s funds by a registered representative who had power of attorney, and of failing to reasonably follow up on any red flags of potential misconduct. The registered rep was the POA on the brokerage account of a senior customer, according to Finra, and“ converted” at least $ 105,000 from the customer by writing checks on her account payable to himself or a bank account he controlled.
Last year, advisor James Daniel Lang, of Westlake Village, Calif., was fined and briefly suspended after Finra accused him of serving as a trustee and executor for a longtime client, earning compensation for both roles, and failing to disclose the roles in writing to employers.
Advisors and firms face overlapping guardrails when it comes to trustee, executor, or POA position-of-trust roles.
Finra’ s Rule 3241 generally prohibits the practice for non-family clients in the absence of prior written approval from their firm. And examiners keep a sharp eye out for problems within such relationships, experts say.
For most registered reps,“ this isn’ t really a judgment call,” says Matthew Chancey, an advisor in Winter Park, Fla.“ It’ s a compliance question with a default answer of‘ no.’” Firms and advisors can build guardrails to manage that conflict, or just recommend that a different person fill the role, he adds:“ The second option is cheaper, cleaner, and doesn’ t require anyone to trust the guardrail.”
The SEC doesn’ t ban position-of-trust relationships, but these situations place advisors in the heart of the agency’ s custody and fiduciary-duty regime. When an advisor at an SEC-regulated firm acts as a client’ s trustee, executor, conservator or POA, the agency treats that as having custody of client assets under Advisers Act Rule 206( 4)-2. That triggers custody-rule requirements: Client assets must sit with a qualified custodian, clients must get regular statements, and in many cases the advisor must undergo an independent surprise exam or provide audited financials for the account holding the client assets.
On top of that, any such role and compensation must be fully disclosed, conflicts must be managed, and self-dealing must be avoided. Undisclosed use of trustee, executor or POA powers for an advisor’ s own benefit can open an advisor to charges of fraud or breach of fiduciary duty. On the state level, securities regulators and probate / trust laws hold trustees, executors, and agents to another layer of fiduciary duties. State remedies
The SEC doesn’ t ban position-of-trust relationships, but these situations place advisors in the heart of the agency’ s custody and fiduciary-duty regime. What makes some advisors step into this regulatory and legal vise? One simple answer is that clients ask them to.
for violation of the duties include removal, reimbursement orders, and licensing consequences.
Bernstein at Hamburger Law stops short of recommending that SEC- or stateregulated advisory firms, in which he specializes, maintain blanket bans.“ You have to make a careful determination that it’ s right for you,” he says.“ It’ s a risk and it’ s a compliance burden and there are ramifications, but I wouldn’ t go as far as saying you shouldn’ t do it.”
The regulatory compliance is relatively easy to arrange, he says:“ It’ s not that hard to hire an accounting firm to do that and update your ADV.” What’ s more, a regulatory carve-out in the Investment Advisers Act of 1940 means serving in a position of trust for a family member might not trigger the custody rule. But legal liability
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