Legacy Engagement: Risks and Benefits
As a Chief Compliance Officer and OSJ supervisor for three different broker-dealers, Mark has conducted compliance office visits of over five-hundred registered representatives’ offices, conducting over four-thousand file audits, and has reviewed and approved tens of thousands of securities and insurance transactions. During this time, he has worked with tens of custodians to determine how each handles account titling and beneficiary designations, including defaults and more, much of which is unpublished information.
Navigating the maze of customer services representatives and their supervisors, to eventually procure the answer from someone in underwriting or legal is not an adventure that many have the time or constitution to pursue, but it is exactly how Mark has gained this information. Accordingly, Mark is uniquely qualified to provide you with expert advice on how to approach this topic with a given provider to minimize the risks of (1) disinheriting intended beneficiaries, or (2) diminishing their inheritance due to their share passing through the probate estate, being reduced by probate fees and or having to divide their share with other “heirs” of the intestate estate, or beneficiaries of the probate estate.
Anatomy of the Problem. Recent industry studies estimate that as much as 80% of all client accounts may have potential problems with inaccurate, inconsistent or incomplete beneficiary designations. The custodians that hold your clients’ qualified accounts which allow, request or require that your clients designate a beneficiary and contingent beneficiaries, may have different:
1. Defaults when either no beneficiary is named, or one or more of the named beneficiary dies before the account owner; and
2. Rules and restrictions relative to your ability to proactively address this potential disaster.
Consequences. The proceeds may not pass to the desired party/ies at the account holder’s death. This could reduce or eliminate what could have been a “designated beneficiary’s” opportunity to stretch out the inherited IRA required distributions to that individual, causing an acceleration of distributions and triggering ordinary income tax due on the distributed amount. Or worse yet, what if a grandchild should have inherited, but instead was unintentionally disinherited due to an erroneous, careless or simplified designation? In other situations, this could result in subjecting assets to the probate process, causing unnecessary expense to the estate (on average 2-5%) and/or subjecting an asset to the deceased’s creditors when it otherwise might not have been.
Advisor and Broker-Dealer May Be Potentially Liable Under the Following FINRA Causes of Action:
1. Breach of Fiduciary Duty: this claim is very broad relative to the span of issues it covers, and clearly, a beneficiary designation, just as with account titling, likely falls within its scope. Argument: advisor recommended “Hartford” (or other) variable annuity, and advisor completed my beneficiary designation in her own handwriting. As my “advisor,” she owes me a fiduciary duty. She should have known and explained the consequences of my selections at the time of the application/ transaction, on which she was paid $$$ commission.
2. Breach of Contract: each account holder is a party to the contract with the broker-dealer (new account form), as well as the end product provider. To the extent that you are the Broker-Dealer’s agent, it is the same “duty” analysis as above.
3. Negligence and Omission of Facts: these are separate and distinct causes of action, but the goal here is for you as “advisor” to begin to see how you will need a formidable defense to counter these claims.
4. Broker-dealer is on the hook for both “Failure to Supervise,” and Breach of Contract.
Defenses:
1. Mark will work with you on a select number of cases so in true, one-on-one coaching and consultation fashion, together you will work through various situations and (1) analyze current designations and potential problems, then (2) discuss what you believe client’s wishes are from prior conversations, and finally, (3) organize a proposal for client’s review and consent to implement changes to best achieve client’s goals based on what we know at the time.
2. As advisor, never write in beneficiary designations for clients with your own hand. Even if you pre-populate in Laser App or electronic file all other information, leave this section for your clients to complete in their own handwriting. Is this is a sure defense? Of course not, but it is one tactic to potentially reduce your liability, and it will probably inspire more ownership from client in the process.
Risks to Advisors in Not Addressing this Important Topic.
If you hold yourself out as an “advisor/adviser,” “counselor” or “planner,” by operation of law in using these terms of art, you commit to the fiduciary duty standard of care of acting only in the “best interests” of your clients. By contrast, if you use the “registered representative” or “financial professional” or “broker” titles, you would owe your clients a fiduciary duty only when providing fiduciary services, such as “fee for plan” or “advisory fees” to manage assets. Otherwise, if you are a “registered representative” selling variable annuities or mutual funds, you owe your client only the duty of “suitability,” which is a much lower standard than the fiduciary “best interests” standard. Most advisors or planners do not mind holding themselves to a higher-than-necessary standard with their clients, so in general, few advisors consider this distinction important. However, where it is vitally important is not just in the advice you provide to the client, but also the advice you should have provided to the client, but did not. These omissions carry far greater weight and cover a substantially broader geography under the fiduciary duty than under the “suitability” duty, which is why this is so important.
For example, you probably do not give a second thought to not giving your client advice on how to title his bank account at Wells Fargo since you do not manage that account. You are probably fine when held to the suitability standard of care. After all, what does a CD at another institution have to do with your suitability determination for selling a variable annuity to your customer under FINRA Rule 2310? However, if you act like a planner, and give advice on a whole host of topics, you indeed could be held accountable for not advising the client to POD that CD consistent with the client’s known goals or wishes. What if an asset needlessly passed through probate causing unnecessary legal fees, or worse, was subject to the claims of creditors, and you could have, indeed should have, prevented it with a simple recommendation to add a TOD to the account, just as you executed with his brokerage account under your management? This is the big OUCH avoidance we plan to address in these engagements.
Benefits to Advisors and Clients when Proactive In Addressing this Topic.
To Client: Advisor will be providing clients with a comprehensive consultation to accurately transfer assets to those whom the client chooses, in the most cost and time efficient manner possible, absent having a lawyer-drafted, properly funded and current estate plan in place. The tax savings to a designated beneficiary of a properly inherited stretch IRA, depending on his or her age, over time could be greater than the IRA’s current inherited value! When coupled with the savings of time, money, and publicity of probate, it becomes a value add well worth an annual fee for you to review to help the client stay current.
To Advisor: Reduce risk of potential liability for not providing this service, while at the same time very likely increasing your revenues in the following ways:
1. Collecting a financial planning fee for this work.
2. Every time you meet with clients, the potential exists to:
a. Gather more of their assets;
b. Uncover additional insurance/financial needs you can offer to them; and
c. Earn referrals for your great work.