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Stockbrokers Cannot Inherit Customer Accounts

For years, financial advisers have walked a fine line when receiving financial inheritances from their clients. Unfortunately, the line between an adviser’s professional obligations and their personal interests is very easily blurred­­—a reality that leads to complicated fraud and ethics violations.In this blog post, we’ll look into the legal issues associated with financial inheritances from clients by financial advisers, potential solutions to the problem, and how a group of bipartisan lawmakers are taking action and calling to the Financial Industry Regulatory Authority (FINRA) for reform.For years, financial advisers have walked a fine line when receiving financial inheritances from their clients. Unfortunately, the line between an adviser’s professional obligations and their personal interests is very easily blurred­­—a reality that leads to complicated fraud and ethics violations.

In this blog post, we’ll look into the legal issues associated with financial inheritances from clients by financial advisers, potential solutions to the problem, and how a group of bipartisan lawmakers are taking action and calling to the Financial Industry Regulatory Authority (FINRA) for reform.

Legal Issues Relating To Stockbrokers Sharing In An Inheritance

They say, the older the wiser; however, the age old saying seems to fall short when it comes to finances. It is no secret that financial abuse of the elderly is an increasing problem in the United States. Elderly Financial Exploitation (EFE) is a form of fraud in which perpetrators exploit vulnerabilities common amongst the elderly, such as cognitive impairment and lack of familiarity with technology. In addition, individuals 65 and older hold more than a third of the wealth in America. Taken together, elder members of society are attractive targets for scam artists and crooked financial advisers.

Unfortunately, the elderly are particularly susceptible to fraud at the hands of their financial advisers. Armed with a trusting relationship and a broad access to client funds, financial advisers are in a unique position to get away with financial mismanagement—often times, without anyone batting an eye.  As it relates to financial inheritance by financial advisers, the legal issues mainly arise in two ways. First, financial advisers fraudulently name themselves as beneficiaries of their client’s estate. And second, many advisers are able to manipulate their way into client inheritance, creating conflict of interest issues.

While both fraud and conflict of interest are legal offenses with appropriate remedies available, difficulties with enforcement often lead to financial advisers getting away with their crimes. Enforcement is difficult because of the thin divide between legitimate and illegitimate financial inheritances. That is, any individual can assign whomever they would like as a beneficiary to their estate—financial adviser or otherwise. However, even “legitimate” inheritances are controversial because of how easy it is for financial advisers to manipulate their elderly and vulnerable clients. To make matters worse, financial advisers are professionally trained to be familiar with the processes of regulatory bodies that oversee these transactions. In other words, savvy advisers know how to maneuver around overseeing systems to avoid detection. So, what is being done about this?

Potential Solutions When A Financial Advisor Shares In An Estate

While regulators are sensitive to the growing threat of EFE generally, to date, FINRA has failed to provide guidelines for individuals who legitimately wish to leave a portion of their estate to their financial advisers. As Senator Catherine Cortez Masto describes in an article on the Wall Street Journal, “we currently have a loophole that permits unscrupulous financial advisers and firms to take advantage of seniors and vulnerable adults.” A step in the right direction, FINRA has provided promising proposals that focus on how financial institutions can respond to potential EFE attacks:

  • Requiring institutions to encourage their elderly customers to appoint a trusted contact person. If EFE is suspected, the institution is responsible for reaching out to the named contact person for assistance.
  • Qualified persons (i.e. supervisory, compliance, or legal employees) are given the authority to place a temporary 15-day hold on disbursements of funds if EFE is suspected. During the 15-day period, the institution is to launch an internal investigation to determine whether EFE has occurred.
  • Financial institutions should strengthen risk assessment and code of conduct practices by including comprehensive procedures of EFE enforcement. Bringing awareness of EFE will increase peer monitoring and improve accountability; thereby deterring EFE in the process.

FINRA’s acknowledgement of EFE is certainly important towards addressing the issue. However, the above proposals are much too general to address the very narrow issue of financial inheritance by financial advisers. More importantly, they do not make the process of detecting “legitimate” financial inheritances any easier.

Regulatory reform is the solution. Regulatory bodies need to lay out guidelines: a step-by-step process to be followed whenever an individual client wishes to leave a portion of their inheritance to any financial professional. At a minimum, guidelines should include the following:

  • Notice to financial advisers of a potential client inheritance;
  • Review and approval of the financial inheritance by a qualified person (i.e. supervisory, compliance, or legal employees);
  • Confirmation by an appointed contact person chosen by the client.

A detailed procedure hedged with a system of checks and balances specifically tailored to the issue of financial inheritance from clients to financial advisers will stop much of the fraud occurring today.

Lawmakers Take Action To Prevent Elder Financial Abuse

In a letter to FINRA, a bipartisan group of four lawmakers asked financial regulators to set out guidelines preventing financial advisers from inheriting assets from their clients. The lawmakers argue that these inheritances create conflict of interest issues that are “inherently problematic.” The letter cites to an article published in the Wall Street Journal where a financial adviser received a $500,000.00 inheritance from the estate of an elderly client who died after suffering from dementia. According to the Wall Street Journal, a spokeswoman for FINRA said its officials are “working to respond accordingly.”

The lawmakers suggest that FINRA put out formal guidelines that punish financial advisers and the firms that accept these inheritances. The lawmakers urge that such firms “should forfeit the bequests, pay large fines and/or be unable to serve as financial professionals in the future.” Like many others, the lawmakers want accountability for crooked financial advisers as well as protection for the elderly and vulnerable.

Certainly, the lawmakers’ propositions are appropriate when a financial professional or institution is found guilty. However, what should be done when an inheritance is found to be legitimate? Textually, the lawmakers seek to prevent these types of inheritances all together. Such a strong stance would certainly solve a lot of problems in regard to fraud and conflict of interest. On the other hand, the thankful client will be barred from leaving an honest inheritance. Perhaps this is the lesser of two evils.

Whatever why you slice it, the time has come from regulatory bodies, like FINRA, to step in and address this longstanding and plaguing issue.

Are You A Victim Of Inheritance Fraud?

Silver Law Group represents investors in securities and investment fraud cases. Our lawyers are admitted to practice in New York and Florida and represent investors nationwide to help recover investment losses due to stockbroker misconduct. If you have any questions about how your account has been handled, call to speak with an experienced securities attorney. Most cases are handled on a contingent fee basis, meaning that you won’t owe us until we recover your money for you. Contact us today and let us know how we can help.

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