Monetary advisors are used to having shut and trusting relationships with their purchasers, given the advisor’s involvement within the intimate particulars of the consumer’s monetary life and the long-term nature of many advisor-client relationships. And it subsequently often occurs {that a} consumer asks their advisor to function trustee for a belief they’ve created. However whereas being requested to function a consumer’s trustee could also be a testomony to the depth of the connection, advisors ought to suppose twice generally earlier than accepting such an appointment. As a result of whereas no rules outright prohibit advisors from appearing as trustees, the moral, fiduciary, and authorized conflicts that accompany serving as a consumer’s trustee can typically make it extra hassle than it is value.
At one degree, advisors who act as each trustee and funding supervisor of a belief face an inherent battle of curiosity, since they stand to learn from the compensation they obtain for managing the belief’s belongings. Which is not essentially prohibited beneath belief regulation, however does go away advisor-trustees open to having their choices challenged by belief beneficiaries, the place the advisor bears the burden of proving they acted fairly and in good religion. Advisors have to be ready to show not solely the prudence of their funding selections but in addition the equity of their compensation preparations with respect to the belief’s beneficiaries.
Compounding this, conflicts also can come up from the twin fiduciary obligations advisors owe when a consumer can be a belief beneficiary. Advisors are certain to behave of their purchasers’ greatest pursuits, however trustees should stay impartial amongst beneficiaries, which can be unattainable to reconcile when not all belief beneficiaries are purchasers of the advisor. For instance, if an advisor-client requests a distribution that one other beneficiary opposes, the advisor-trustee should navigate a fiduciary grey space the place impartiality is required however loyalty to the consumer can be anticipated.
Regulatory concerns additional complicate the matter. Advisors who function trustees are typically deemed to have custody of belief belongings by the SEC and state regulators, requiring annual shock audits – a time-consuming and costly course of usually borne by the agency. Whereas there are exceptions for shut household relationships or co-trustee preparations, these are slim and sometimes impractical. For RIAs, being named as a successor trustee (stepping in solely upon a consumer’s loss of life or incapacity) can briefly keep away from custody, however full compliance turns into mandatory the second the advisor assumes management of the belief. Equally, broker-dealer representatives face their very own hurdles, as FINRA guidelines require pre-approval and ongoing supervision from the broker-dealer agency earlier than appearing as a consumer’s trustee, including yet one more layer of oversight.
Given these layers of complexity and threat, most advisors are higher served by declining one-off trustee appointments until they’re ready to supply trustee companies as a structured, skilled line of enterprise. Advisors who pursue this route should set up clear consumer acceptance standards, legal responsibility safety (together with E&O protection and authorized entity structuring), and sturdy operational methods to satisfy their administrative and fiduciary tasks. These embody managing distributions, tax reporting, beneficiary communication, and ongoing funding administration. Achieved proper, such a service could be a compelling value-add for high-net-worth purchasers preferring a ‘one-stop store’ for wealth and belief administration, and also can function a differentiator in a aggressive market.
Finally, the query of whether or not to function a trustee comes all the way down to intentionality and infrastructure. Advisors who say sure have to be absolutely outfitted – legally, operationally, and ethically – to satisfy each roles with out compromise. For everybody else, the extra prudent path is to construct robust referral relationships with certified company trustees or attorneys who can fulfill that position, guaranteeing purchasers’ wants are met whereas defending the integrity of the advisor-client relationship. Both means, the objective stays the identical: to honor the immense belief purchasers place of their advisor by guaranteeing their needs are carried out with competence, impartiality, and care!