Keep Financial Advisors Out of Your Will and Trust

Brokers are not allowed to engage in outside business activity without informing their firm first, a requirement explained in FINRA Rule 3270. This includes creating a will for an investor, even if the investor has expressly stated that they wish the broker to do so.

FINRA 3270 Guidance: What is Considered an Outside Business Activity?

“Outside business activity” refers to any work performed outside of the scope of the broker’s relationship with the firm. “Work” does not have to have a definite paycheck attached — under Rule 3270, it can be any work that the broker has a reasonable belief will result in compensation. The work does not have to be related to the securities business.

Outside Business Activities Example: What Happens When a Broker Breaks the Rules?

Brokers be warned: FINRA is ready to impose fines to penalize outside business activities. For example, in June 2019, a broker entered into an Acceptance, Waiver, and Consent agreement with FINRA, in which he consented to the findings that he had engaged in outside business activities by creating a will and trust for a client without receiving authorization from his firm. After the investor died, the broker sent an itemized invoice to her son for $5,050. This included charges for estate planning, creating the will, and creating the trust agreement. The invoice came with a note stating, “Failure to pay within 14 days will result in a legal claim against the Estate and all legal fees associated.” The broker also allegedly sent an email to the investor’s daughter-in-law threatening a lawsuit if he did not receive payment for his services.

What Did the Broker Get Wrong?

Notably, the broker was not a lawyer and never attended law school. He created the will and trust using templates provided on the internet. In the Broker Comment section of the BrokerCheck disclosure, the broker stated: “[The investor] expressed on many occasions her distrust of attorneys. Because of her attitude toward attorneys, the broker copied prototypes of a will and an irrevocable trust from the Legal Zoom website and amended them to reflect what he believed were the wishes of [the investor] and her family members.” He further stated that he believed that his client had full possession of her faculties, and that he gave the drafts of the will to his client and her family members for review.

Whether the investor had her faculties and whether she and her family reviewed a draft of the will and trust do not relate to the FINRA allegations. The broker may feel that these details characterize his actions in a better light, but even if true, he still would have violated Rule 3270 by failing to receive written authorization for the outside business activity from his firm.

Consequences of Non-Compliance with FINRA Rule

On March 12, 2020, the broker’s firm, LPL Financial, fired him, citing the “Preparation of a will and trust for a customer without prior disclosure and approval from Firm.” As part of the terms of the AWC, the broker consented to a $7,500 fine and a three-month suspension.

Financial Advisors Should Not Get Involved in Investors’ Wills

FINRA is aware of the threat posed by financial advisors’ involvement in the creation of wills and trusts. For that reason, they adopted Rule 3241 in February 2021, a rule that prevents registered representatives from being named a beneficiary of an investor’s estate. In the SEC notice regarding the proposed rule, FINRA referenced a letter from Fitapelli Kurta, which stated that a registered person should not be permitted to be a beneficiary or hold a position of trust for a customer.