Financial planners are still trying to live down Bernie Madoff's mayhem. FINRA may be named to regulate investment advisors. Most wealth managers, though, aren't wrestling with Ponzi schemes or additional scrutiny. Advisors' burdens often center on the deceptions, frauds and blunders wrought by their own clients.
Potential land mines can nestle in unexpected places: the seemingly stable marriage of longtime clients, a small inheritance or the tax returns of retirees.
The biggest troubles, many advisors say, arise from messy divorces. "There are times when one of the parties in a divorce will willingly divert assets, and that's when I go into full gear," says Lili Vasileff, founder and CEO of Divorce & Money Matters of Greenwich, Conn., an RIA firm that focuses on the financial ramifications of the demise of marriages.
Clients may try to deceive a spouse or advisor by making deceptive or fraudulent statements in property settlements, even though admissions made in such documents are signed under penalty of perjury. Sometimes documents are forged.
What can an advisor do to uncover falsehoods in a document? "The first thing is to get a full credit report," Vasileff says. Such reports have helped her discover second mortgages and liens. Clients, she warns, may feign surprise, denying the signatures are theirs.
WAR OF THE CLIENTS
Sometimes it's not fraud, but the tenor of relations that can make advisors' lives agony. One of the toughest situations for any advisor is when married clients become enemies.
"In divorces, we work for both spouses," explains David Hultstrom, president of Financial Architects in Woodstock, Ga., which has $30 million in assets under management. The firm's standard contract asks the client to acknowledge that spouses are considered a single entity.
Any information provided by one partner must be shared with the other, and authorization by one partner is considered an agreement by both. "In a case where we think a spouse may be unaware of something that affects him, we will tell him about it," Hultstrom says.
Ken Waltzer, president of Kenfield Capital Strategies in Los Angeles, says that individual assets are separate property. That knowledge helped him negotiate the split of an unmarried lesbian couple, exacerbated when one partner sued the other.
"Both remained clients, but when one wanted to know the assets of the other, I told her that I couldn't divulge any information," he says. "As a fiduciary, I cannot divulge one client's information to another. Once the couple split, they were separate clients. This would be true even if they had been married.''
Divisions over inheritances also can make an advisor's peaceful practice hell. The mother of one of Waltzer's clients died, leaving the client with an inheritance he didn't want his wife to know about. This can be common, the advisor says, especially in second marriages when one spouse wants to ensure that children from the first marriage inherit the money.
Inheritances can create nests for indiscretions, even fraud. "The complexities of the probate process and estate administration provide opportunities for fraud, and planners need to be especially vigilant," says Thomas Tillery, vice president and co-founder of at Paraklete Financial in Kennesaw, Ga., a firm that advises other wealth managers, attorneys, CPAs and private banks.
In the process of gathering client data, Tillery says, he discovered a client was moving money into his personal account from a trust account. The client, an estate executor, thought he deserved to be compensated for his work. Tillery believed the client was acting fraudulently and terminated their relationship.
"The other inheritors needed to know what was happening,'' Tillery says. "Thousands of dollars were being moved from the estate account and into a personal account. I couldn't continue to work with the man," he adds.
Tillery and other financial planners stress the importance of discovery. "The advisor has an obligation to learn as many facts as possible in order to make correct recommendations; otherwise, you could end up in litigation," he says.
WHEN DILIGENCE IS DUE
David O'Brien, president of O'Brien Financial Planning in Midlothian, Va., says that planners ignore such due diligence at their peril. "If a prospective client can't provide full financial information to a fiduciary planner, the RIA firm shouldn't take the client on,'' he says.
"We work in a transparent manner and must expect the same from our clients. I think the liability to us is too great to represent a client who may be holding back information," he says.
Advisors can make mistakes in the early days of setting up an advising shop, when they are most eager to acquire clients, says J. David Lewis, president of Resource Advisory Services in Knoxville, Tenn., with $70million in assets under management. Early in his practice, Lewis says, he felt that two clients hadn't been honest in their intentions.
"Twice, I had women start client relationships where their husbands were very unresponsive in providing information needed for financial planning," he recalls. "I cobbled together as much as I could in creating net worth statements and reports. I was paid, but later, because of the ways these relationships evolved and ended, I believed, and still believe, these women's unspoken agenda was for me to help them gather information for divorces they were planning."
QUESTIONS FOR BOTH PARTNERS
Sometimes red flags are obvious. David Diesslin, president of Diesslin & Associates in Fort Worth, Texas, recalled when a couple came into his office for an introductory session. The husband owned a successful business. "I'd gotten 80% of the information I needed and thought that it had been a wonderful insight session," he remembers.
"In my normal process, I ask questions of both partners." As the meeting ended, the husband asked if he could return the next day because he needed to speak privately.
At that meeting, the husband disclosed that he and his wife led separate lives and that he kept some matters entirely from his wife - one being that he was supporting another woman. "At that, I closed my notebook," Diesslin says. "I told him that I work for both spouses and it's not going to work. They didn't become clients. You wouldn't keep employees if you doubted their word or experienced a loss of trust, and it's the same with clients."
Janice Fioravante, a New York writer, has contributed to Institutional Investor and The New York Times.