The Ombudsman for Banking Services and Investments (OBSI) recently published a couple of case studies that illustrate some of the challenges that firms face when dealing with senior investors and their adult children.

A. Firm Acted Fairly and Reasonably When It Refused a Request Made under a Power of Attorney (POA)

In early 2018, the daughter (Ms. M) of a firm’s terminally ill, senior client (Mr. D), told the firm that her father had requested that she sell all his mutual fund holding and transfer the balance to a joint account belonging to the two of them. She was named as a substitute decision maker under his POA. The nature and amount of the transfer caused the firm’s compliance department to flag the transaction as suspicious. They tried to obtain Mr. D’s confirmation that he agreed with the trade instructions but couldn’t reach him. The firm refused to act on the request, taking the position that the relevant statute required that all actions of an attorney be for the sole benefit of the grantor.

Mr. D passed away the day after the trade request was issued, although the firm wasn’t informed of this fact for another month. In the meantime, Ms. M tried unsuccessfully to convince the firm to reverse their decision. When the firm eventually learned of Mr. D’s death, they requested the documents needed to settle his accounts, including probate documents. Ms. M, however, sought to have the funds transferred to the joint account without having to probate the will. The firm refused on the grounds that the POA was no longer effective and they were obliged to deal only with the executor under his will, which she was not. Ms. M complained to OBSI.

OBSI found that the firm’s decision to deny Ms. M’s transfer request was justified because the request wasn’t made for his benefit. She had been seeking to avoid probate on his will, and if the transfer had occurred, Ms. M would have had no legal obligation to use the funds in the joint account according to her father’s wishes as expressed in his will. Even though the firm wasn’t aware of Mr. D’s poor health at the time of the initial request, OBSI found that the firm had reason to be concerned that the trade was not in Mr. D’s best interests and that it took appropriate steps to protect his accounts.

Our Takeaway: Registrants should be very careful when releasing funds to non-clients, even those that purport to have a valid POA. As registrants start having to grapple with one of the greatest generational wealth transfers in history, they should be seeking professional advice on how to deal with estate and power of attorney questions.

B. Seniors Aren’t Always Low-Risk Investors, But DSCs Generally Are Inappropriate for Them

Mr. H was an experienced investor who, in 2008, accepted his new financial advisor’s recommendations to buy gold and precious metal funds with deferred sales charges (DSCs) as part of his $1.4 million portfolio. In 2016, a year after he had retired as a physician, he suffered a stroke and his son, who was a financial advisor in the United States, offered to help him with his investments. His son reviewed his portfolio, calculated that his father had lost close to $40,000 because of unsuitable investments, DSCs and lost opportunities, and brought these concerns to the advisor’s firm. The firm agreed to refund the DSC fees that Mr. H had incurred when he sold investments in 2017 but took the position that the investments themselves were suitable. Mr. H’s son complained to OBSI.

OBSI found that Mr. H. wanted to grow his investments, was comfortable with the lack of diversity in his portfolio, spoke to his advisor each month and communicated these wishes, understood the volatility in his portfolio and had the knowledge and capacity to understand and question the know-your-client (KYC) documentation he had signed. OBSI also found, however, that during certain periods the risk composition of Mr. H’s accounts exceeded his documented KYC parameters. OBSI recommended that the firm increase its previous offer of $9,000 to $12,000 to account for the losses on unsuitable investments. Mr. H and the firm accepted this recommendation.

Our Takeaway: This case illustrates how KYC documentation can play a critical role when a firm is dealing with customer complaints or regulatory inquiries. When a client’s intentions are clearly reflected in the KYC documentation and the transactions and account holdings are consistent with that document, a registrant will have a much easier time convincing a complainant and a third party that it is discharging its obligations to that client.