Investors: Do You Know What Happens to Your Securities When You Die?
FINRA has strict rules regarding broker conduct following the death of an investor. Additionally, firms typically have their own rules for transitioning the account to the account holder’s heirs and beneficiaries. Both investors and their beneficiaries should familiarize themselves with the rules to ensure a smooth transition.
Families should make sure to let the firm know that an investor has passed away as soon as they can. At that point, the firm should immediately look for the account beneficiaries to begin the account transfer. After they receive all the necessary documentation, the brokerage will move the investor’s portfolio to a new account in the beneficiary’s name.
What Documents Do Firms Need to Transfer an Account?
Financial advisors will ask beneficiaries to provide the following documents:
· Death Certificate
· Court Letter of Appointment
· “Stock Power” — a type of power of attorney that allows for the transfer of stock
· State tax inheritance waiver, if applicable
· Affidavit of domicile
· For accounts held in trust: Trustee certification showing the successor trustee
· For joint accounts: Letter of Authorization signed by the surviving tenant
Legally, beneficiaries of a new account cannot begin buying and selling shares until they complete the transfer. Financial advisors are not allowed to continue trading activity once they learn an investor has died; they must wait until they have instructions from the account’s new owner.
What Should Beneficiaries Do Once They Have a New Account?
Investors who recently inherited securities should be sure to ask the following questions:
· How does the fee structure work?
· How do financial advisors make investment decisions?
· What type of investments are in my account?
Financial advisors should also ask plenty of questions about their new investors, including their income, risk tolerance, and financial goals.
What Happens When a Broker Doesn’t Follow the Rules?
Financial advisors who do not follow the official protocol could face serious consequences. Their firm may choose to terminate their employment and they could face fines from FINRA.
· In 2019, a brokerage fired one of its brokers following allegations that he did not follow the firm policy regarding an investor’s death. In April 2021, a FINRA investigation made the preliminary recommendation to discipline the broker for allegedly accepting trading instructions from an unauthorized party following the investor’s death.
· Investment strategies expire with the investor. In 2013, an investor passed away, leaving his wife as his securities account beneficiary. The broker found out about his client’s death in March 2013. To complete the transfer, the broker had asked the widow to visit his office and submit the necessary forms. The widow did not complete the forms until December 2013.
When the investor died, the account had an investment strategy in place. Between March and December of 2013, the broker executed 45 securities trades. These trades were in line with the investment strategy agreement, but that agreement expired upon the investor’s death. As a result, FINRA fined the broker $5,000 and imposed a one-month suspension. You can read a copy of the AWC here.
What Can I Do to Ensure a Smooth Transfer?
Investors can talk to their brokerages and advisory firms about “Transfer on Death” (TOD) plans. Using a TOD, you can designate a beneficiary for your brokerage account. Rules may vary by state but having a TOD in place usually means your securities account can skip probate — the court’s review of your will. TODs also supersede your will.
What Happens to Securities When There is No Will?
Rules may vary among states, but the closest living relatives typically receive the securities.
Can I Make My Broker a Beneficiary?
Investors often work with their financial advisor for many years, often establishing substantial trust. Many may even consider their financial advisor a close friend and may want to add them as a beneficiary to their securities account. FINRA Rule 3241, however, only allows brokers to become their investor’s beneficiaries under strict circumstances:
1. The broker is the investor’s immediate family member, OR
2. The broker receives permission from their firm.
FINRA recently recommended disciplinary action for a financial advisor who made special efforts to circumvent his firm once they denied his request to be named the beneficiary of an investor’s six-figure account. For this alleged unethical conduct, FINRA is seeking to impose monetary sanctions.
Do You Have Concerns About How an Account Was Handled?
Investors should feel comfortable asking their financial advisors questions and should get a comprehensive explanation of their investing strategy. Remember: you can always transfer your portfolio to another firm if you are not happy with your financial advisor. Most importantly, contact a securities attorney if you have questions about how a firm handled an account following an investor’s death.
