last will and testament waiting to be filled and signed

This article was written by Michael Bookman and Ellen Bessner. Michael Bookman is an associate at Babin Bessner Spry LLP.

The risk of losing your licence is real if you agree to be executor of a client’s estate and/or accept an inheritance from a client. Advisors must ensure they are familiar with the rules governing these matters and the serious implications of contravening them in order to protect themselves from severe regulatory penalties.

It is easy to imagine clients wanting their advisors — who are in a position of trust with their clients — to administer their estates after their death. This might come with an added sweetener of inheriting a gift in the client’s will, thereby making the advisor both an executor and a beneficiary. An advisor may not even know that they have been appointed executor until after the client dies. What happens then?

It’s essential to know the rules (for both IIROC and MFDA members) that prohibit such acts, as well as your dealer’s policy manual provisions on the subject. If you become aware that a client has named you as an executor, always advise your dealer immediately so compliance can help navigate your way out of the role and advise on whether you should refuse an inheritance. If your dealer tells you that you can accept the inheritance, make sure to confirm this in writing with compliance so there are no misunderstandings later.

The MFDA recently banned a dealing representative for life for contravening its rules in this area. The former rep acted as an executor and trustee for two of his clients’ estates. From one client, he also inherited Air Miles as a beneficiary – no cash or other benefit at all. The MDFA launched an investigation – with which the former rep did not cooperate (a mistake that advisors should get legal advice on if they are inclined to ignore their SRO)  – and ultimately reached a settlement agreement that saw the former rep banned and ordered to pay a substantial fine.

Below are the applicable MFDA and IIROC rules regarding acting as a client’s executor or trustee. Don’t forget to also check your dealer’s policy manual provisions.

MFDA rule

With some very narrow exceptions, acting as an executor is contrary to MFDA Rules. In particular, Rule 2.3.1 states:

No Member or Approved Person shall have full or partial control or authority over the financial affairs of a client, including:

  1. accepting or acting upon a power of attorney from a client;
  2. accepting an appointment to act as a trustee or executor of a client; or
  3. acting as a trustee or executor in respect of the estate of a client.

What is interesting is that this rule does not expressly prohibit advisors from being a beneficiary of a client’s estate. However, the hearing panel accepted a settlement that provided that accepting an inheritance from the client’s estate was a conflict of interest and a violation of Rule 2.1.4. This broad rule requires that mutual fund advisors identify potential conflicts of interest and raise such concerns if they arise with the client and dealer, and take direction from the dealer to ensure that the best interests of the client prevail.

IIROC rule

IIROC’s Rule 43.1 prohibits the same kinds of activities: “An employee or Approved Person of a Dealer Member must not, directly or indirectly, engage in any personal financial dealings with clients,” which includes having control over an estate of a client (see Rule 43.2 (5)) or accepting any consideration — including remuneration, gratuity or benefit — from any person other than the dealer (see Rule 43.2 (1)(i)).

Avoiding conflicts of interest

There are many rationales behind both the IIROC and MFDA prohibitions, but one central issue is the risk of conflicts of interest.

When an advisor acts as an executor or trustee for clients, conflicts of interest easily arise. Quite often, advisors build close relationships of trust with their clients. Always remember that your duty is to the client first. It is not for you as advisor to decide but, rather, it is the responsibility of the dealer to be the judge of whether a conflict exists.