Archive for October, 2009
Clients Behaving Badly: Why You Should Get Rid of an Unscrupulous Client
Posted by Jerry Cooper in News, Practice Management on October 23rd, 2009
Greed is back. As markets recover, clients begin a marathon to make up losses. For many, it’s going to be a legitimate race. But, for others — who see themselves with a sense of entitlement, their eyes will be on cutting corners through insider trading profits, creditor fraud and tax evasion.
These undesirable clients will seek your help. They may use their account relationship with you to hide their deeds. If you ignore red flags as they appear you may be unwittingly drawn in as their willful accomplice.
If your honor and reputation is worth more to you than your client’s questionable business, this report should offer some guidance on how to begin the process of protecting yourself.
“Greed is good.” This is the credo of the aptly named Gordon Gekko (Michael Douglas), the antihero of Oliver Stone’s 1987 film Wall Street. Gekko, a high-rolling corporate raider, is idolized by young-and-hungry broker Bud Fox (Charlie Sheen). Inveigling his way into Gecko’s inner circle, Fox quickly learns to rape, murder and bury his sense of ethics. Only when Gekko’s wheeling and dealing causes a near-tragedy on a personal level does Fox “reform”-though his means of destroying Gekko are every bit as underhanded as his previous activities on the trading floor.
As life often imitates art, a real life version of the movie Wall Street played itself out in the courtroom and media less than ten years ago. In this real life drama, the antihero was Martha Stewart, the media mogul and cooking diva whose sense of entitlement included insider information about ImClone Systems at the end of 2001.
Stewart avoided a loss of $45,673 by selling 3,928 shares of her ImClone Systems stock in late 2001. The day following her sale, the stock value fell 18%. When asked officially if she sold one day before the stock’s collapse on insider information, she said “no.”
Stewart needed the help of Peter Bacanovic, her stockbroker at Merrill Lynch to corroborate her story. Both Stewart and Bacanovic were boxed into a corner by making false statements to investigators.
As a Federal jury found, Bacanovic was covering up for Stewart. Bacanovic placed a very high value on preserving and protecting his relationship with the cooking diva. He traded his career, ethics and values to protect her.
From Brokerage House to the Big House
The parallel between fiction and fact saw the ended careers of both Fox in Wall Street and Bacanovic, Stewart’s broker in real life. Bacanovic wound up serving five months in Federal Prison near Las Vegas and five months of probation. He was fired from his job at Merrill Lynch and banned from the securities industry.
He said in a New York Times interview, “I was indicted not because I was the biggest criminal on the block or the biggest insider trader in history. I was indicted simply to bring a case against my celebrity co-defendant. I was a device.”
An advisor can be blinded by client loyalty, says Dayle Carlson, a well-respected criminal law expert and correctional consultant in Northern California. It takes a sense of ethics and clear values to draw a line between right and wrong.
I interviewed Carlson last week for this report from his office in Sacramento. He said that the profits created from a good client may often overshadow the sense of right and wrong. A client relationship often involves social events such as golf tournaments, tennis matches and parties. It’s tough to say “no” to a client when you’re managing millions of dollars.
Carlson sees all kinds of criminal behavior, but when it comes to financial crimes involving greed and fraud, the theme is often consistent. Carlson calls it “hubris behavior” which he sees quite frequently in his practice. His definition is one who is both extraordinarily arrogant and exhibits a strong sense of entitlement. In Stewart’s case, Carlson is correct.
Carlson says hubris behavior may offer you a clue that your client is on the wrong path. He added that your client may send you other signals.
These include:
- Reluctance to Discuss Account Changes. Clients reluctant to provide information for updating account information or transaction processing.
- Conflicting Information. Clients who provide conflicting information without providing explanations for their inconsistencies.
- Suspicious Activity. A sudden change in the pattern of business involvement. A request for wire transfers or transaction with unknown sources.
He added that observing stressful behavior is also a key to knowing what your client might be doing. Carlson said, “Stress may come from addiction such as gambling or sexual addiction or from financial problems.”
Spotting Trouble
Keeping an eye on your clients is part of your duty. Section 326 of the Patriot Act and other requirements of your customer identification program should require frequent screening of your client’s activities to detect any kind of suspicious activity.
Although there is no screening formula that can be used to detect a client with a bankrupt value system, asking the right questions may often yield results. Tax evasion might manifest itself in the sudden use of offshore corporations, foreign trusts or an increased desire to travel to places like the Cayman Islands and Liechtenstein.
Much of the luster of offshore bank accounts has worn out amidst the aftermath of the UBS scandal, but there still remains the diehard client who is bent on cheating Uncle Sam and feels fully justified because he may not like the way the government is being run.
Insider trading is another slippery slope that you as an advisor need to watch for. The last thing you need is to be asked by your client “do you have any inside information.” When I was a stockbroker I used to get that question asked all the time and my answer was always no. However, the client that can’t accept no from his advisor often doesn’t stop with you.
He may continue pursuits and go right to the source of the information he seeks in order to determine how to make a trade on your watch with inside information.
Silence Is Not Golden
If you detect that a client may be up to no good, keeping quiet about it can be your biggest mistake. With prosecutors looking at ensnaring as many people that help the culprit as possible, financial advisors are prime targets. The ostrich approach of sticking your head in the sand and ignoring the telltale signal of criminality can make you an accomplice and culpable in any legal proceeding.
Therefore, it is important and crucial that, upon discovery, your suspicions be reported to the compliance department and a plan be undertaken to give the client his pink slip.
It’s good business to get rid of your bad clients. Prosecutors look for wealthy clients who are considered highly valued targets for their prosecutions. Early detection and elimination of bad apples can save both your career and a great deal of embarrassment to your firm.
Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the research.
Pershing’s “Trust Network” Wins it Top Honor as the RIA’s Most Trust-Friendly Custodian
Posted by Jerry Cooper in News, Practice Management on October 16th, 2009
Advisor’s frozen in time since last October’s Meltdown have begun to warm up to attracting more “sticky” trust relationships. Our data shows that among the four major custodians, Pershing is the best choice based on more independent options and the best ongoing support.
As the financial winter appears to be behind us, advisory firms are now dusting off their growth agendas in pursuit of capturing more assets and higher quality accounts. With the surge in M & A activity beginning, advisors are looking to support different avenues of growth for developing new trust account relationships.
Joseph Spatucci, Vice President, of Pershing, LLC. says “Seventy percent of high wealth accounts over $1 million are associated with trusts.” This statistic gives RIA’s plenty of motivation to pursue attracting new trust account business.
With bank trust departments no longer interested in accounts less than $5 million there lies plenty of opportunity for the advisor to land new relationships. However, they must have the know how, expertise and support of a trustee firm to harvest this business. The first place an advisor will likely go to for support is their custodian.
This report looks closely at four of the major custodians, Schwab, Fidelity, TD and Pershing as to what their “recommendations” are for bringing in new trust business.
At first, one might think that Charles Schwab, with 52 percent of the market share, $575 billion under administration would be their first choice to go to for such highly complex support. 
However, the Trust Advisor team spent several weeks researching all the custodial firms to determine who offers the best support and resources to help bring in new trust relationships.
Pershing Advisor Solutions, the fourth rank, low man on the totem pole custodian outranked its other three competitors for several compelling reasons. First and foremost, given the fact that a trust relationship generally speaking average account size is $1 million to $5 million that coincides with selecting a custodian that is best suited to support the high end market – Pershing.
Last year, quoted in Fundfire, Mark Tibergien, Managing Director and CEO of Pershing Advisor Solutions said “We can’t out Schwab Schwab in serving the masses.” He added “We are focusing on larger teams wanting to grow their business serving larger clients. We look through the advisor to the end client so the measure of success is not the size of the advisor firm; it is the size of the client.” Tibergien added, “Emphasis is on the wealthier client who aligns itself perfectly to being the best suited custodian for supporting trust business since its average account size is $1.3 million.”
Tibergien’s words are reflected in the account concentration analysis show below. Despite Pershing’s small size, it packs a mean punch when it comes to hosting larger firms with large size accounts.
Last year Pershing launched a “Trust Network”open architecture platform of trust administration providers. This network is unique since Pershing does not have its own in-house trust company as Fidelity, Schwab, and TD have.
They have no agenda or preconceived trust provider to send clients to. They offer a selection of highly qualified and competent trust only administrators who perform trustee and administration services for directed trust relationships.
In this process, the RIA firm is assured of keeping the account relationship since it retains the investment management functions. In addition the providers listed on Pershing’s “Trust Network” offer no custody of assets in competition with Pershing, making a perfect fit for hosting assets on Pershing’s custody platform.
This chart below, Trust Friendly RIA Custodians provides a snapshot of the important features of a trust provider for developing new business. 
Particular emphasis is placed on being directed to providers that support the creation of GST exempt trusts or dynasty trusts, asset protection trusts, these are trusts that protect assets from unwarranted lawsuits and the risk of litigation, and supports directed trusts which permits the investment management to be delegated to the advisor so the client continues to have a seamless relationship with the advisory firm.
In addition, trust providers should recommend trust relationships in tax free states which in particular amongst the three providers noted accomplishing this are, Pershing, Schwab, Fidelity with recommended resources in Delaware.
I spoke Spatucci, at the June 2008 Insite Conference. Spatucci said, Bank of New York Mellon agreed to serve as the trustee for directed trust accounts provided the assets were in the bank’s custody. “That did not square off with us at Pershing”. He added, it forced his team to go off and find a better solution.
Pershing execs, with Spatucci in charge, came up with the idea of the Trust Network which supported the concept of open architecture, meaning that an advisor would not be steered to an in-house custodian-owned trust company, but instead would be fully supported using outside trust providers that it checked out and were added to its network.
In May 2008 Pershing announced the launch of the Network and unveiled its first showcase of providers at the 2008 Insight Conference in June. In attendance, Wilmington Trust, AST Capital Trust, now Advisory Trust and Santa Fe Trust Company all substantial and quality administrative trust providers.
I have had several contacts with the Pershing team since 2008. I have received great feedback from several advisors. For more information on the Pershing Trust Network, call Shadia Kirk, Vice President of Pershing who handles the program. Shadia is very trust literate, understands the issues and can be reached at 1‑630‑472‑6741.
CHARLES SCHWAB
All in one provider Schwab has always been keenly aware of the requirement to support trust relationships with the fact that it must agree with Spatucci’s 70 percent trust relationship metric has gone to considerably to make certain that it hosts a comfortable environment for its 5,500 RIA firms that depend on it for custody and clearing.
The first good decision Schwab made was to host its trust providing resource in the State of Delaware. This permits its trust company to host GST exempt trusts or dynasty trusts, asset protection trusts and directed trusts. Last year, Schwab announced that it would create a stand-alone trust provider in Delaware. For more detailed information on their support call Thomas Forrest, President of Personal Trusts, Charles Schwab Bank in Delaware. His telephone number is 302‑622‑3616.
FIDELITY
According to a 2005 news article, Fidelity seemed to be on a path similar to one that Pershing took last year for a referral program. The program from what we can determine was run by Donna Cournoyer, Fidelity’s vice president for trust services.
From what our research shows Fidelity has done it right by hosting its own trust provider in Delaware, Fidelity Personal Trust Company. This would permit this trust provider to host the special purpose trusts that are required to support these types of relationships. At this point. Donna appears to have left Fidelity last year, with no clear successor. Therefore, the only missing link is to determine who is in charge of Fidelity to connect all the dots. In other words who is the resource person there to contact should one wish to arrange for supported trust services.
TD INSTITUTIONAL
From what I can determine TD Institutional before it was TD and only Ameritrade seemed to be on the right track. It announced in the same 2005 press report that it offered trust services through an open architecture program and referred its advisors to two Delaware based institutions, American Guarantee and Trust and Capital Trust.
Then, an announcement came in January 2007 by Tom Bradley at TD Ameritrade’s chief that it had purchased the business assets of Gayle Weiss and Associates including its trust company subsidiary International Clearing Trust Company.
It was not clear from the announcement how much TD invested for this enterprise but it did say that the purpose of the trust company was not to support its advisors for directed trust relationships but to support defined benefit contribution plan and retirement plans.
The odd fact about this acquisition is that International Clearing Trust Company, ICTC, was chartered in the State of Maine.
Maine is not a GST exempt trust state nor is it a state that supports the type of trust business that advisors are looking for such as from Delaware, South Dakota, Nevada, or Alaska. On April 15, 2008 the State of Maine approved the name change from International Clearing Trust Company to TD Ameritrade Trust Company.
Again another odd move TD Ameritrade purchased a Fiserv Trust Company as a Colorado industrial bank and merged its assets into what appears to be the Maine trust company. Fiserv hosts a thriving business of supporting a custodial and retirement account trusteeships mostly for alternative assets at relatively pricey fees.
I have placed several calls to TD Ameritrade to find out exactly what their trust support policies were and was not able to learn much. I was not able to find a key resource person to let me know whether or not TD supports the directed trust relationships for the creation of special purpose trusts that many advisory firms are interested in pursuing.
As more and more trust business is created, the four major custodians and others are going to zero in on supporting trusts. Pershing in particular at this point seems best suited based on our findings to host this business.
Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the research.
Trust Administrators Tool-Up for Custody and Care of Client’s Genetic Property
Posted by Jerry Cooper in News on October 9th, 2009
Exclusive Report
Leading Trust Companies and Multi-Family Office Providers will Soon be Staffed with Advisors Trained in Family Formation Matters
The role of a trustee is expanding. Trusts are evolving to harness medical advances. With the use of stem cells and other genetic material babies born today are expected to live over 100 years.
As part of this evolution, new state laws now make extracting live sperm from a dead body for later reproductive use legal. Cryobanks around the country are receiving customer deposits of frozen reproductive cells which include stem cells, cord blood, sperm, eggs and embryos. The courts have held that genetic material is property, like securities and may be bought, sold or transferred.
Unclaimed and abandoned property or genetic material in these banks, including sperm or embryos can be used to create a child through in vitro fertilization (IVF) without the knowledge or consent of the owner. This child, if conceived by a former wife or ex-girlfirend may have rights to an ultimate inheritance from the owners estate.
To account for this material, estate planners have begun to recommend adding provisions to their client’s trusts to be sure this property is managed properly after death – requiring trustees to understand this new language and take on new responsibilities.
Frozen Heirs
The process begins by storing sperm or an egg with the idea that a child may be born after the death of one of the parents. In the past, a child would be born after the death of his or her parent only if the father died during the pregnancy or the mother died during delivery. Most state’s laws account for this and protect an after born child to permit that child to inherit from the deceased father or mother. In other words, a child conceived during the parents’ lives is protected and is considered a lawful heir.
In 1999 everything changed with the birth of Brandalynn Vernoff, the first known child in the United States conceived with the sperm of a dead man. Brandalynn’s father, Bruce Vernoff, was only 35 when he died in 1995 from an accidental overdose of prescription medications. Thirty hours later, at the behest of Vernoff’s grief-shattered family, a doctor extracted five vials of Vernoff’s sperm and stored them in a sperm bank. In 1999, using advanced reproductive technology, a team of specialists posthumously fertilized Bruce’s widows’ eggs. The result was Brandalynn who arrived March 17, 1999 – almost four years after her father drew his last breath.
This is called posthumous conception. It is now possible and with the use cryopreservation, a family can complete its family formation objectives after the death of one on the parents.
But there are still pieces of this puzzle that need to be understood. First, how does a trustee arrange for collection of live sperm from their dead clients corpse? And, second, what inheritance rights does a posthumously conceived child have from their father’s estate?
First, as trustee, you should know, in advance, if the medical powers of attorney require the executor or trustee of the estate have sperm extracted and cryopreserved. Of course, you can avoid all of this ahead of your clients death by advising them to deposit eggs or sperm in a cryobank.
Hurry, We Need a Urologist
I interviewed Theresa M. Erickson, an astute and knowledgeable family formation lawyer based in San Diego, California. Erickson says, depending where you are “finding someone to extract sperm from a corpse may prove difficult.” She added, “most urologists are reluctant to perform the procedure.” Sperm is not preserved indefinitely in a dead body. It should be extracted within 36 hours or less. Although she said, ”one doctor told her that it can be good for up to one week.”
Therefore, for the trustee, when you receive one of these trusts, be sure you have a willing urologist available on-call as you never know when your client may suffer an accidental death. You might start by asking for a referral from Los Angeles Urologist Dr. Cappy Rothman, the physician who extracted the sperm in the Vernoff case. He is also a co-founder of the California Cryobank.
Once you have multiple vials of your deceased clients sperm, you as trustee, will need to get it deposited into a cryobank. To get clear on this, I interviewed Scott Brown, from the California Cryobank, America’s biggest and oldest sperm bank. Brown says is easy to make a deposit. This is usually handled though the physician that collected the sample. However, they will take a direct deposit from a trust company on behalf of their trust client. Opening an account and making a deposit is not like depositing money with Bank of America. Brown says you should have your attorney draw up an agreement. This agreement should be clear as to who is the sperms owner.
The next step for the family it to decide what to do with the sperm. This decision has to be made quickly. California laws say the sperm must create a child within 2 years from the death of the donor, or the child will not have an entitlement to an inheritance. It is legal to use the use the sperm beyond two years, but the child will not see any money from the estate.
All of these thorny issues involving family formation after death of a spouse should be spelled out long before the death of a family member. I found one estate planning law firm in Denver that deals with these issues head on. I interviewed Teresa C. Baird, last week. Her firm, Fairfield and Woods, PC provided a sample trust provision for attorneys to address the inheritance rights of posthumously conceived children.
Barid gives her clients an intake questionnaire before drafting a will or trust. Baird always asks the question about cryo banking genetic materials — “its good practice.” She also asks, “what would you like to happen in the event of your death, would you like sperm or eggs deposited into a cryobank?”
Baird says the legal authority in this area is ”murky” at this time, but will likely be better defined as this practice increases. Baird says, “it is essential that planning take place, beginning with an critical conversation, as very few courts have addressed these questions.”
Questions of Control
Both attorney’s Erickson and Baird agree that genetic property or materials need to be accounted for both before and after death.
While alive, any deposits made in the cryobank need to be correctly titled to either the owner of the material or the trust that governs its disposition. Therefore, when an estate planner creates at trust provision that requires the redemption of sperm or embryos from a cryobank it is important that the trustee have proper standing with the depository.
Brown from the California Cryobank says the instructions as to what to do with the material must come from the owner or the person who has a power of attorney. While alive this agreement should have specifics as to who has the right to contribute and withdraw these materials.
In following the death of the owner of such material it is important to specify in any trust provision that, in the case of sperm, that it be used only by a specific individual and for a limited time period. Erickson pointed out that in a case where a celebrity or multi-millionaire that had former wives or girlfriends “you don’t want them coming forward and claiming the sperm and therefore a right to a child and its rightful inheritance.”
In addition to what may be available to a trust company client for legal remedies there are certain measures that the owner of sperm should do to keep track of his genetic property.
A Mischievous Mistress
Here is a hypothetical situation that might exist in the absence of controls of sperm. Let’s say you have a client who is 70 years old and is worth $100 million. He is married, has three children and a wife. In addition to his family life he has several mistresses, one of which has a hidden agenda.
As our multi-millionaire has frequent sexual relations with his mistress he is strict about using a condom.
At the end of each episode the mistress politely removes the condom filled with semen, takes it into the bathroom, and flushes the toilet. But instead of discarding the condom with the semen, she stores it in a plastic bag. After he leaves, she promptly takes it down to a cryobank and deposits it under her name.
Over the span of a ten year relationship she may have made dozens of deposits.
Then one day the multi-millionaire suddenly dies. He is not around to make any claim one way or another to have fathered another child but our mischievous mistress becomes impregnated with the multi-millionaire’s sperm, announces to the estate she is pregnant with his child. Her lawyers come to the trustee perhaps you, to include her child in the class of beneficiaries for distributions to his children. At the end of the it is her word against the estates as to what the intent of the deceased client.
Of course this is a hypothetical but it can happen. There are two things that might be done when advising a multi-million dollar client: 1) Make certain that estate planning documents are crystal clear who are and are not legitimate children, entitled to the inheritance. 2) If one is having an affair it might be a good idea to take your soiled condom out the door with you!
As reproductive medical technology improves and more genetic property including sperm, eggs, embryos, stem cells and more get stored at cryobanks there will become an ever so important requirement for trust administrators to understand this new science and to be thoroughly familiar with how to both control and manage your client’s genetic property.
Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes contributed to the research.
Michigan Adopts Uniform Trust Code
Posted by Steven Maimes in News on October 2nd, 2009
Effective April 2010, Michigan joins 21 states in adopting the UTC to provide less confusion with the administration of trusts.
- UTC adopted in 22 states
The Michigan Trust Code becomes effective April 1, 2010. Michigan becomes the 22nd state to adopt a single set of laws to govern the creation and administration of trusts.
The Uniform Trust Code (UTC) is a model code for states to use to create a uniform, comprehensive, easy-to-find body of trust law. With some exceptions, it is generally a default statute or is used to supplement and revise state’s existing laws concerning trusts.
It was written by the Uniform Law Commissioners, part of the National Conference of Commissioners on Uniform State Laws, in 2000 and last amended in 2005. It is approved by the American Bar Association, American Bankers Association as well as the AARP.
Some form of the UTC is currently adopted in the following 22 states: Alabama, Arizona, Arkansas, Florida, Kansas, Maine, Missouri, Michigan, Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia and Wyoming; plus the District of Columbia. Four additional states have introduced bills to adopt it and several other states are reviewing the bill.
Without good state trust laws, attorneys, trustees, beneficiaries, and third parties dealing with trusts find only minimal statutory and case law to interpret trusts, to try to fill in blanks when trusts are silent, unclear on issues, or have contradictory provisions.
Another need, especially important in our nomadic society, is having a body of trust law that is similar to the law in other states. The Uniform Trust Code was developed to provide concise, flexible and easily accessible rules concerning the use of trusts. Without the Uniform Trust Code many states relied upon common law to settle disputes. The UTC specifically addresses many issues that cause disputes or ambiguities such as trustee delegation.
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