Trust Funds: Potential Playground for Abusive Financial Advisors

Trust Funds are an especially susceptible vehicle for fraud committed by FINRA registered stock brokers and financial advisors.  Two of the primary issues in such cases are “conflict of interest” and “breach of fiduciary duty.”

Trust funds can be created for a wide variety of reasons.  Frequently, though, they are used as a means to afford an orderly transfer of wealth to a younger generation.  They can offer a whole host of benefits that would make a trust fund the preferred choice over an outright gift.  For example, the recipient/beneficiary may be very young, and the trust could afford some level of control or stability to prevent the beneficiary from squandering the money.   Another reason may be certain tax advantages offered by the trust structure that would not be available in an outright give.

Regardless of the reason or reasons for its creation, a trust is going to need a trustee.  The trustee is the party responsible for overseeing the trust and managing its assets.  While trusts can hold different types of assets, they frequently contain securities, like as stocks and bonds. Therefore, such trusts would, by necessity, involve brokerage accounts.  In that case, clients will oftentimes look to their stockbroker/financial advisor to put on a “second hat” and serve as trustee.  The logic being “I already trust him/her with my money so why not let them be the trustee.”  However, this is where significant problems can be created.

Trustees have a fair amount of privileges when it comes to managing the affairs of the trust (presuming, of course, they comply with their fiduciary obligations and other duties, including duty of loyalty).  They should also steer clear of conflicts of interest.

However, when a trustee is also the broker of record for a brokerage account holding assets of that trust, the temptation to breach their fiduciary obligations and succumb to conflicts of interest can become too great to resist.  (This is not to say that all brokers who serve as trustees will exploit the positions of trust they have been placed in. But, when someone does, the results can be devastating.)

So what conflicts are we talking about?  One classic example of a conflict that can arise is commission generation.  For a trustee, the goal would be to minimize the costs associated with management of the trust.  The lower to costs, the more money available for the beneficiaries.  However, for a broker who is working on commissions, the opposite may be true.  The more trading in the account, the more commissions that are generated, the more money that winds up in the broker’s pocket at the end of the day.  With full autonomy to direct trading, a broker/trustee can devastate the trust, while making themselves a mint in the process.

A broker may also be tempted to invest the trust’s assets in a “pet project” of his/hers.  This could come in the form of a private company or a small public one with which the broker has a relationship (and may be receiving kickbacks).  An investment like this would likely be wholly inappropriate for the trust and a could constitute a violation of the trustee’s fiduciary duty.

Regardless of exactly how its done, a trustee abusing their position to the detriment of a trust is not appropriate.  In many cases, the trust beneficiaries may be entitled to be compensated for their losses.

The securities lawyers at Malecki Law have experience representing defrauded investors for breach of fiduciary duty and have successfully helped those clients recover much of their losses.  If you believe that you or a family member have suffered losses due to misconduct by a financial advisor, trustee or other fiduciary, you should contact the attorneys at Malecki Law for a free consultation at (212) 943-1233.