New Trend Requiring Tax Advice for Advisers?

Posted on April 17th, 2016 at 4:43 PM
New Trend Requiring Tax Advice for Advisers?

From the Desk of Jim Eccleston at Eccleston Law LLC:

Recently, FINRA heard a case in which an elderly woman and her daughter sought and were awarded more than $50,000 for what an arbitrator constituted as insufficient tax advice regarding an IRA distribution. Interestingly, the $50,000 award issued even though the claimants had suffered only about $9,000 in additional taxes on the distribution of a $30,000 IRA CD. Additionally, the investment was not purchased from the advisor in question.

Marilyn Green, the elderly woman in question, held a CD in an IRA with Bank Atlantic. Marilyn was suffering from dementia and depression and left her financial affairs to her daughter, Melissa Green, who had been given power of attorney. As the CD approached its maturity date, Melissa consulted her mother’s registered representative from LPL Financial who had been contracted by Bank Atlantic to provide investment advice and brokerage services.

During Melissa’s consultation with her mother’s advisor, he recommended that she withdraw the funds from the maturing IRA CD and place them in her mother’s personal checking account. Importantly, at that point, he failed to provide information regarding the potential tax consequences of that transaction. Following the advice, Melissa closed the IRA CD and transferred the funds. In the next year’s tax return, Melissa learned that her mother’s IRA distribution resulted in almost $9,000 of additional income tax. The Greens filed a claim with FINRA.

When the case reached FINRA a number of causes of action were alleged including: negligence, gross negligence, breach of duty of good faith, and fair dealing and negligent misrepresentation/omission. The Greens sought:

  • Compensatory damages of $9,000
  • Expense associated with FINRA arbitration
  • Associated attorneys’ fees
  • Punitive damages of at least three times compensatory damages
  • Amounts to cover the tax bill resulting from any award

LPL Financial and its registered person tenaciously denied the claims, asking the arbitrator to deny them entirely, expunge the incident from the advisor’s record and award reasonable attorneys’ fees.

What happened? One of the arbitrators explained that the Greens showed that the advisor had an actual and implicit business relationship with Mrs. Green and that he held a position of trust. Furthermore, the arbitrator reached the conclusion that the advisor breached the relationship of trust when he failed to disclose the possible tax consequences.

 Many have raised questions regarding the award total based on the investor’s loss. The failure to provide tax information led to a $9,000 loss for the investor, yet the total award was more than $50,000. The award totaled more than the original IRA CD investment of $30,000.

The possible de facto precedent being established through FINRA arbitration necessitates that advisers and firms take steps to protect themselves. In the past, many firms have used generic disclosures in an attempt to exclude themselves from any responsibility to provide tax or legal advice. But, the results of the Green case show that such measures may not be a sufficient defense. Certainly, it is essential that their advisers fully understand all of the consequences of any recommendation they make and make certain to provide detailed information to the client in order to avoid any negative action. 

The attorneys of Eccleston Law LLC represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today.

Tags: Eccleston, Eccleston Law, Eccleston Law LLC, James Eccleston, FINRA

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