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Keep Reminding Clients About the Importance of Being a Fiduciary

An advisor's job of educating clients about the benefits of working with a fiduciary is never done.

I write a lot about the importance of a fiduciary relationship between financial advisors and their clients. I can even sound preachy at times. But there is a clear and striking difference between a fiduciary and nonfiduciary: The former is legally required to put the interests of clients first; the latter is not.

Advisors who are fiduciaries may make this a core part of their sales pitch to a new client. But we shouldn't assume that just because a client has signed on with us, that he or she really understands why it matters. The education work doesn't end there. And if your clients don't truly understand the difference between a fiduciary and nonfiduciary, all your good intentions could turn out to be worthless.

To illustrate my point, I'd like to present an extreme case of financial abuse as experienced by one of my clients when he ended up doing business with a nonfiduciary. I've been going over and over this situation in my head, thinking about what I could have done to prevent it, so I've included some of the lessons I learned.

The Background
Jed and Daisy (all names have been changed) had been clients of our firm for many years. Jed was a retired teacher, and Daisy worked part time at a local health food store. They lived a simple but active life, providing some caregiving help to Daisy's mother and disabled sister and donating time to their church and local charities.

Based on outward appearances, one would never guess that Jed came from money. Through his grandfather, Jed's mother was worth well over $100 million dollars. Even though Jed was the sole beneficiary, his mother did not believe in giving him any money before she was gone. The family had a significant charitable foundation, and Jed was active on the board. That was the closest he got to living in a monied environment.

We would caution Jed that when the time came, people would come out of the woodwork to take advantage of him. We explained how we were different than other advisors because we were fiduciaries and required by law to put his interests first. We pointed out that stockbrokers, insurance agents, and many other people who called themselves advisors were viewed as salespeople in the eyes of the SEC--and were not held to a fiduciary standard. And we emphasized that, as a fiduciary, we would help him achieve the long-term goals that he wanted: financial stability for his family, college education funding, and philanthropy.

What Could We Have Done Differently?
As you'll soon see, we should have reinforced this concept more frequently and more in-depth. We could have just frequently shared articles that reinforced the difference between what we do and what a nonfiduciary does, such as Christine Benz's "5 Questions to Ask a Financial Advisor."

Jed's mother passed away suddenly. He flew back to Colorado for the funeral. Jed was heartbroken from the loss of his mother and wasn't focused on financial affairs. Yet immediately after his mother's memorial service, his mother's banker told him he had to sign some documents to "facilitate account titling." Jed didn't understand what he was signing, but the banker assured him that the forms were just a formality. Unfortunately, we found out about this after he returned. None of us had expected that any financial matters would be addressed during this trip.

We only had only a short window of time to talk to our client before his trip. Not expecting any wolves to attack right after his mother died, we merely expressed our condolences and told him he didn't need to worry about anything financial right away. But I should not have been so optimistic! I believe if we had told him specifically to not have financial meetings and to not sign anything, things would have turned out differently.

When We Entered
After recovering from the shock of his mother's death, Jed met with us to discuss next steps. He told us the banker, Jezebel, had been calling and emailing him relentlessly, while he was also fielding messages from his mother's estate attorney and her investment advisor. He gave us a copy of the papers he signed, which turned out to be him turning over the trusteeship of the estate to the bank; we will refer to the bank as Big Bank.

We talked to Jed's estate attorney, who told us that a) Big Bank was also a client of hers for which she performed ongoing work and b) Big Bank had obtained authorization to be trustee on all of the estate's assets. This included the "B" trust that held $75 million of concentrated stock that was to pass directly to Jed, the "A" trust that was to provide Jed income and HEMS access (a provision allowing Jed access to principal to the extent needed for his health, education, maintenance, or support), and a charitable trust that was to be distributed to charitable beneficiaries. Plus, there were personal assets, including the house, personal affects, and about $20 million in various investments not held in trust, that would now be subject to probate.

In our call, the estate attorney offered the opinion that Jed may have been "railroaded" (her word!) when asked to sign the documents after the memorial. But she also believed it would make it easier for the assets to be under one umbrella. As for the assets headed to probate, they just never got around to taking care of them, the attorney said.

What Could We Have Done?
The reality was that because Jed was our client, his mom's estate was a material factor for his financial plan. Without being intrusive, we should have asked for more information on Jed's mother's estate and the people involved before she passed away (see another of Benz's articles, "How to Plan for an Inheritance"). I'm not sure if we could have prevented all of the disasters but preventing any would have been a big improvement.

Digging Through the Weeds
It turns out that the banker, Jezebel, told Jed that her mother had worked with Jed's mother for decades and that she took over when her mother retired. She further stated that she was very close with his mother and that his mother would have wanted her to handle things.

In the meantime, Jezebel introduced Jed to a new investment advisor, her colleague Bernie. Bernie was a vice president in Big Bank's affiliated investment company. Bernie promised that Jed would be part of an elite group of clients and that his firm would even do a genealogy study for him. When Jed asked if our firm could be involved, Bernie assured him that he would work with us--as long as his firm's minimum of $50 million was met. This was convenient because Jed's share of the estate was $75 million of concentrated stock, which Bernie said would be immediately sold. After taxes, there would be $50 million to invest. So, Bernie's plan was to sell the stock, pay the tax, and then invest primarily in Big Bank's proprietary mutual funds--with no future involvement on our part.

Jed's mother's investment advisor, Ivan, had ingratiated himself as a family friend. Whenever Jed traveled to Colorado, they would play golf together along with his mother's accountant, Clyde. Ivan had managed the investments in the A trust as well as the mother's personal account. As a close friend of the family, he wanted and expected to continue the professional relationship. Clyde's CPA firm had prepared tax returns for Jed's mother for decades. Although this was expensive, everything always seemed to get done. The fact that they were all friends seemed to make for a nice, cohesive professional group. But the reality for Jed was that Ivan and Clyde were working for their own financial interests and not putting his interests first.

Untangling the Mess
Our client was not happy. It was now clear to Jed that the attorney had assisted in Big Bank's power play. In fact, she was not willing to draft paperwork to revert trusteeship back to Jed. My co-worker and I joined Jed on his next trip to Colorado. We prepared ahead of time and had made appointments with a recommended estate attorney, a new trust company, and Clyde.

Our meeting with the new estate attorney confirmed our worst suspicions. There was no excuse for leaving over $20 million out of the trust. And, of course, it was completely unethical to shove papers in front of a mourner without explaining the ramifications. Upon her reading of the documents, the new attorney determined that Jed had the power to remove Big Bank and reinstate himself as trustee. We agreed to meet the following day for Jed to sign the documents.

Finally, we met with Clyde and his associate. The first comment out of the accountant's mouth was that Jed was making a mistake to hire a new attorney and remove Big Bank as trustee. We were shocked and asked how he knew about this. He sheepishly admitted that the estate attorney had called him (so much for confidentiality).

It was clear that the entire team had carefully orchestrated a well-thought-out plan.

Although we did not trust Clyde and his firm, we felt it made sense to let them finish Jed's mother's final tax return and estate tax filings.

There was much more to the saga: big investment losses thanks to Ivan's high-commission "private placements," high CPA bills, and the fact that Big Bank did not let go easily. In the end, Jed had to cough up $90,000 to Big Bank before it would "accept" being removed as a trustee without a court battle.

Lessons Learned
The lessons learned here were expensive. Multiple millions of dollars were lost to bad investments, probate fees, excess accounting fees, and payments to Big Bank. Notwithstanding the potentially unethical actions/malpractice of the attorney, bank, and CPA firm, none of the investment advisors were fiduciaries. They were not Registered Investment Advisors, nor were they Certified Financial Planners or "fee only" members of the National Association of Personal Financial Advisors.

For us, there was a simple lesson. Our job of educating clients about the benefits of working with a fiduciary--and what warning signs to look for when dealing with a nonfiduciary--is never done.

Had our client been prepared ahead of time and truly understood that because none of the other people on his team were fiduciaries, there were myriad conflicts of interest that could manifest. In fact, if his mother had been educated on the differences between fiduciary and nonfiduciary advisors during her lifetime, the whole, sad tale would never have happened.


Sheryl Rowling, CPA, is head of rebalancing solutions for Morningstar and principal of Rowling & Associates, an investment advisory firm. She is a part-time columnist and consultant on advisor-focused products for Morningstar, and she continues to actively run her advisory business, from which Morningstar acquired the Total Rebalance Expert software platform in 2015. The opinions expressed in her work are her own and do not necessarily reflect the views of Morningstar.