Should a Financial Adviser Inherit a Client's Assets?

Summary

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WSJ Your Money Briefing: Should a Financial Adviser Inherit a Client's Assets?

Date: May 23, 2019
Host: J.R. Whelan
Guest: Gretchen Morgenson, WSJ Reporter
Main Theme: Examining the ethical and regulatory dilemmas of financial advisors inheriting client assets—spotlighting a controversial Maryland case and Congressional efforts to address potential conflicts of interest.

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Episode Overview

This episode dives into the story of a Maryland financial adviser who became the beneficiary of a client’s sizeable estate, sparking national scrutiny, ethical questions, and Congressional inquiry. Host J.R. Whelan chats with WSJ reporter Gretchen Morgenson about her investigative report and the regulatory gap that allows advisers to inherit from clients, exploring the unfolding legal, ethical, and legislative responses.

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Key Discussion Points & Insights

1. How the Story Came to Light

• Background: The Wall Street Journal's investigation uncovered a case where a Maryland broker inherited $500,000—a quarter of an elderly client’s assets—despite firm policies meant to prevent such conflicts.
  • "He received a quarter of the assets in the client's account, a quarter of all of her assets, which was $500,000." — Gretchen Morgenson [03:02]
• Industry Impact: Many in the financial world—and on Capitol Hill—were unaware that current rules did not universally prohibit these arrangements.
  • “I received a lot of emails from readers saying I had no idea that this was even allow.” — Gretchen Morgenson [03:11]

2. The Loophole and Regulation Gap

• Firm Policies vs. Industry Practice: The adviser’s firm had rules requiring disclosure of bequests, but the adviser concealed his status as beneficiary.
• Regulatory Response: The national regulator (FINRA) took no action, exposing a gap between firm policies and enforceable regulations.
  • "The Financial Industry Regulatory Authority did not bring action against the broker, did not bring action against the firm, even though he did receive this bequest." — Gretchen Morgenson [03:35]
• Potential for Conflicts: Guest points out the inherent conflict of interest when advisers stand to benefit directly from clients’ estates.
  • “You obviously have the potential for conflicts of interest when a financial advisor is a beneficiary to a client's account.” — Gretchen Morgenson [03:26]

3. Client Consent and Mental Capacity

• Client’s Wishes or Exploited Vulnerability?: The adviser’s longtime client made the bequest, but questions remained about her mental capacity at the time.
  • "Doctors or her doctor said that she was probably not understanding what she was signing when she transferred her accounts into an account that would pay the beneficiaries directly. And so ... was she in her full fat. She had actually been diagnosed with vascular dementia." — Gretchen Morgenson [04:22]
• Ethical Dilemma: The client had been diagnosed with vascular dementia and died within a few months of changing her account.
  • “So the question does exist about whether or not she had her full faculties.” — Gretchen Morgenson [04:40]

4. Whistleblower and State Investigation

• State Insurance Probe: An experienced Maryland Insurance Administration investigator concluded the broker acted unethically and recommended he be barred from selling insurance and fined.
  • “The investigator was fired, and the insurance administration determined that nothing had gone wrong in this case.” — Gretchen Morgenson [05:32]
• Superiors Disagree: Despite the findings, the state dropped the matter and dismissed the investigator.

5. Legal vs. Ethical Boundaries

• Acting Legally, But Unethically?: The Maryland administrator acknowledged the difference between legality and ethics in these situations.
  • "Sometimes people do things that you don't think is right, but it's not illegal." — Gretchen Morgenson, quoting administration head [06:04]

6. Congressional Reaction and Potential Reforms

• Bipartisan Action: Senators from both parties are pushing FINRA to explicitly forbid financial advisers from inheriting client assets due to their fiduciary duty and risk of conflict.
  • "They're trying to take finra ... make them put in rules that will say, this is improper, this is wrong. This violates our rules and regulations." — Gretchen Morgenson [06:45]
• Proposed Penalties: Lawmakers want rules for restitution, penalties, and removal from the profession if violated.
  • “If you violate those rules, you will be penalized, you will have to give the money back, and you will no longer be allowed to do business.” — Gretchen Morgenson [07:11]
• Bipartisan Momentum: Morgenson expresses optimism that it will gain traction, highlighting strong bipartisan support and public surprise.
  • “This seems to me to be an issue that is not controversial. I’ve heard ... from a lot of readers who are perplexed that this could even happen.” — Gretchen Morgenson [07:29]

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Notable Quotes and Memorable Moments

• On public surprise:
  “I received a lot of emails from readers saying I had no idea that this was even allow.” — Morgenson [03:11]

• On regulatory action:
  “FINRA ... did not bring action against the broker, did not bring action against the firm, even though he did receive this bequest.” — Morgenson [03:35]

• On ethical complexity:
  "Sometimes people do things that you don't think is right, but it's not illegal." — Morgenson, quoting MD insurance administration [06:04]

• On momentum for reform:
  “This seems to me to be an issue that is not controversial.” — Morgenson [07:29]

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Important Timestamps

• [02:33]—The Maryland case details and firm policies
• [03:26]—Potential conflicts of interest
• [04:22]—Doubts over client’s mental capacity and dementia diagnosis
• [05:10]—Investigator's findings and subsequent dismissal
• [06:04]—Legal versus ethical debate
• [06:45]—Congressional push for new FINRA rules
• [07:29]—Public and bipartisan reaction

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Summary Takeaway

The episode spotlights how a little-known loophole lets financial advisers inherit from clients—raising sharp ethical questions and prompting corrective action from lawmakers. The story underscores the need for clear industry standards and regulatory reform to prevent conflicts of interest, especially when vulnerable clients are involved.

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Transcript

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] Washingtonwise.

[B]

Here's your money briefing. I'm J.R. whelan at the Wall Street Journal in New York. Should a financial advisor be able to inherit assets from their clients? The Journal recently reported on an advisor who did just that. Congress saw the story and now is getting involved to stop it. We'll speak with the reporter who wrote the story in a moment. First, these money and market stories. You should know inflation is currently sitting at 2%, but don't expect it to rise much in the near future amid the data that came out of the Federal Reserve on Wednesday, the central bank said it sees no reason to lower interest rates to bring prices higher. In fact, New York Fed President John Williams said he expects the economy to grow just over 2% this year and he sees the 3.6% jobless rate going even lower as the year goes on. And he says that worries about the economy have subsided a bit since the start of the year. And Harriet Tubman won't be appearing on the $20 bill anytime soon. In fact, it might be another decade before that happens. You recall back in 2016, during the Obama administration, the the Treasury Department announced a broad redesign of the $20 bill. Well, Treasury Secretary Steven Mnuchin said on Wednesday of this week he was focused on new security features on the 20 to fight counterfeiting. But any decision on images likely won't be made until 2026. Now, originally there was a push to put the image of a woman on the $10 bill replacing Alexandra Hamilton, but that triggered a public campaign to keep Hamilton. That that was inspired by the popular Broadway play about the first treasury secretary that led officials to consider a woman for the 20. In April, the Wall Street Journal reported how some financial advisors inherit money or property from their clients. Well, that came as a surprise to many on Capitol Hill, and now Congress wants answers. Gretchen Morgenson wrote that story for the Journal, and she joins us with details. So, Gretchen, senators from both parties have taken issue with many facets of this story, including the ethics behind financial advisors inheriting assets. But a loophole in the law actually allows it.

[C]

Well, what happened was we had a situation in Maryland where a broker was a beneficiary in elderly clients, even though his firm had rules against bequests saying that you had to tell your superiors that you had received a bequest. You were going to receive a bequest. He did not do so. And he received a quarter of the assets in the client's account, a quarter of all of her assets, which was $500,000.

[B]

Oh, my.

[C]

So this was an interesting situation. I think a lot of people were shocked by it. I received a lot of emails from readers saying I had no idea that this was even allow.

[B]

So this does go on to the point where this financial advisor's firm had set up more or less guardrails and rules around it. So it's not an unusual thing to happen.

[C]

Well, I had never heard of it before. You obviously have the potential for conflicts of interest when a financial advisor is a beneficiary to a client's account. And so you would think that there would be rules and regulations against this. But in this particular case, the regulatory authority that oversees this broker and most brokers in the United States, the finra, it's called the Financial Industry Regulatory Authority, did not bring action against the broker, did not bring action against the firm, even though he did receive this bequest. So I think what the lawmakers are saying is this is a loophole. This is something that needs to be changed, and it needs to be changed now.

[B]

And the woman, he was a longtime advisor to, her, she knowingly bequeathed this money to. There was nothing really in the story that said that she didn't have all of her faculties or anything like that. She seemed to want to do this.

[C]

Well, that's a question. Actually, she did make the bequest. However, doctors or her doctor said that she was probably not understanding what she was signing when she transferred her accounts into an account that would pay the beneficiaries directly. And so what you have here as a question is, was she in her full fat. She had actually been diagnosed with vascular dementia, and she died just a few months after switching these accounts and signing that documentation. So the question does exist about whether or not she had her full faculties.

[B]

And the story you wrote has a lot of twists and turns, and it takes an interesting turn when an investigator from Maryland's Insurance Administration got involved.

[C]

Yes, this was really one of the most unsettling aspects of the this was an insurance product that had been sold to the elderly client, and the payout to the broker came in the form of cash from an insurance product. So the Insurance Administration, an investigator, a longtime investigator, very experienced, took up this case, wanted to investigate it, and concluded that the broker had acted unethically and that he should be barred from selling insurance in the state. And he should be fined. What happened next was the investigator was fired, and the insurance administration determined that nothing had gone wrong in this case.

[B]

So he acted legally. But the question was, was it unethical?

[C]

Well, that is what the head of the Maryland administration was trying to tell me in my April story when he said, sometimes people do things that you don't think is right, but it's not illegal. So here was a situation where the investigator felt that he had enough facts and ammunition to bar this broker from, you know, activity in the state. But the administration, his bosses, didn't agree.

[B]

So you received a copy of a letter from senators who are taking issue with this. What is the specific issue that they have? The good news is that they read the Wall Street Journal. Okay, so that's how they found out about this. What is it they're actually trying to accomplish here?

[C]

They're trying to take finra, the regulatory oversight. They're trying to make them put in rules that will say, this is improper, this is wrong. This violates our rules and regulations. Again, they point out this conflict of interest that appears or that arises when a broker can benefit from a client's passing. And so they want FINRA to say, no, that's not allowed. We have rules. And if you violate those rules, you will be penalized, you will have to give the money back, and you will no longer be allowed to do business.

[B]

Is it too early in the process to know if the senators have broad support for what they're trying to do?

[C]

Well, I like the fact that it's a bipartisan group of senators. We have people on both sides of the aisles. This seems to me to be an issue that is not controversial. I've heard, as I said, from a lot of readers who are perplexed that this could even happen. And so I think that I hope that it will get traction.

[B]

All right. It's a good story to read in the Wall Street Journal by Gretchen Morgenson. Check it out on WSJ.com or the WSJ app. And Gretchen's good enough to be in our studio with us. Thanks for coming on the show.

[C]

Anytime. Thank you.

[B]

And that's your money briefing. I'm J.R. whelan in New York for the Wall Street Journal.

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. [e-mail] WashingtonWise.