An elderly couple, who are clients of one of our investment advisors, want to name him in their wills as the trustee of a trust for their child. If we switch the clients to one of our other representatives, would it be permissible for the original advisor to serve as trustee and would this mean we didn't have custody?
— M.T., Atlanta
According to a FAQ on the U.S. Securities and Exchange Commission's website "the role of the supervised person as trustee is imputed to the advisory firm, thus causing the firm to have custody." So it wouldn't matter if you switched the relationship to another advisor; the firm will still have custody. However, it is my understanding that the custody would not be triggered until such time as the advisor actually becomes the trustee (in this case upon death of the clients).
Also, keep in mind that according to the SEC, "the role of the supervised person as trustee will not be imputed to the advisory firm if the supervised person has been appointed as trustee as a result of a family or personal relationship with the grantor or beneficiary and not as a result of employment with the adviser. A similar analysis would apply where the supervised person serves as the executor to an estate as a result of a family or personal relationship with the deceased." Note, however that a personal relationship developed as a result of providing advisory services to a client over many years is not the type of "personal relationship" they're talking about.
What is our fiduciary duty regarding elderly clients with diminishing mental capacity? We have a number of older clients and so far they have all had their spouses take over when their mental capacity began declining. However, we recently had some clients' adult children (who are also clients, but not on the parents' accounts) telling us that their parents are making questionable decisions.
— L.C., California
Unless a client has been adjudicated incompetent by a court or has given someone else authorization to give instructions on their account, you're still obligated to take orders from that client. But, you also have an obligation to refuse to execute a trade that you consider to be unsuitable for the client given all the facts and circumstances. Anytime a client goes against your recommendations you should document the matter and alert your compliance department. It may be necessary to write to the client to document that you recommended against the particular course of action. At some point, you may even need to "fire" the client. That said, if a spouse tells you their husband or wife's mental capacity is fading, or if a client's children advise you that their parent(s) faculties are declining, you can't simply take instructions from that spouse or child. The person must be authorized to give instructions on that account. But, you might be considered to be "on notice" of the client's diminished mental capacity in that case. If, for whatever reason, you suspect that a client is losing their faculties, you should make sure to document your observations and address your concerns with your compliance and legal counsel and to determine the best course of action. For example, if you have discretionary authority you could consider taking action to protect the assets by moving them into less volatile investments or suggest that a trusted family member apply for guardianship. Of course, it's much better to have these discussions when your clients are younger and can provide someone with a power of attorney to be used only in those situations. Many firms have developed procedures to identify "red flags" that may indicate a client's diminished capacity or a reduced ability to handle financial decisions. The SEC has a good report on how to deal with these issues, which is at: http://www.sec.gov/spotlight/seniors/seniorspracticesreport092208. pdf.
Alan J. Foxman is an attorney in private practice in Boca Raton, Fla.
He also works as an independent contractor with National Compliance Services
Inc. in Delray Beach, Fla. He can be contacted at this email address.