Advisor inheritance case a cautionary tale for Canadian wealth industry

Case of ex-dealing rep named as sole beneficiary to elderly client's $1.8-million estate holds lessons for firms and advisors

Advisor inheritance case a cautionary tale for Canadian wealth industry

When it comes to elderly clients, wealth firms and advisors are expected to uphold a higher standard of care and ethics. That was underscored sharply in a recent finding by Ontario’s Capital Markets Tribunal.

In a decision document dated February 28, the tribunal detailed how Aurelio Marrone, a former mutual fund representative registered with IPC Investment Corporation, “acted unfairly, dishonestly and in bad faith towards his vulnerable client,” and in doing so breached the rules of the Mutual Fund Dealers Association of Canada (MFDA) as well as his dealer firm’s policies.

The breach revolved around Marrone’s failure in 2017 to report conflicts of interest involving a client who was “clearly vulnerable” by virtue of her “advanced age, terminal illness, [and] lack of formal education and financial sophistication.”

The client, whom the tribunal said had “a personal relationship” with Marrone, named him as the sole beneficiary to her estate, which is estimated to be worth around $1.8 million, and as an alternate executor. She also granted him a power of attorney for her property.

The tribunal ordered that Marrone be permanently banned from the capital markets and imposed an administrative penalty of $500,000, in line with recommendations from Ontario Securities Commission staff. It also ordered Marrone to pay $85,000 in costs and did not order any disgorgement, as it could not conclude that his failure to disclose the conflicts to his firm resulted in him being named as a beneficiary to her will.

In a statement to Wealth Professional, James Ryu, vice-president for Advocacy and General Counsel at Advocis, said the decision highlights how the new Capital Markets Tribunal takes conflicts of interests seriously, particularly for advisors that intermix personal and professional relationships.

“The Tribunal made it clear that conflicts, whether real or perceived, must be managed in the best interests of clients,” Ryu said. “Sometimes, this means the advisor must decline to act in a certain capacity even if the client requests that they do so.”

Ryu noted that Marrone cited his pre-existing relationship with the client as a mitigating factor with respect to concerns about vulnerability, but the tribunal instead considered it an aggravating factor. The lack of evidence of any financial harm to the client, he added, “didn’t matter to the tribunal” in this case.

For John Moakler, president & senior executive financial planner at Moakler Wealth Management in Ontario, the case highlights risks in working with advisors who don’t have a fiduciary obligation to their clients.

“I’m a CFP and a CLU. … When I renew my designations each year, I’m never asked ‘Are you an executor of one of your client’s estates?’” Moakler told WP. “I think that should be a mandatory question.”

Since 2021, the Financial Industry Regulatory Authority (FINRA) in the U.S. has required all its members to affirmatively permit or prohibit stockbrokers from acting as a trustee or executor to a client, or receiving a bequest from their estate. Under FINRA Rule 3241, brokerage firms must assess risks that arise when a customer appoints a registered person to a position of trust, or being named as a beneficiary.

Moakler is a member of the Investment Counsel Portfolio Managers channel, which was opened for independent advisors in 2013. Because the ICPM channel has a separate custodian to hold on to clients’ money by law, he says he is physically incapable of taking a client’s money.

“When you have elderly clients, you should bring in the executor of their estate, or their adult children, and let them know what’s going on with the client’s investments,” Moakler says. “You must have the client’s permission to do that.”

He also believes that at the industry level, dealers should have safeguards to automatically trigger a branch-level review when clients reach the age of 70.

“It comes down to a compliance issue,” he says. “When you have a client who’s 70 years of age or older, then the compliance officer at your branch must make a separate phone call with that client to make sure everything’s ok.”

In other recent cases, advisors have been charged with altering client contact information in their dealers’ information systems, preventing their firm from effectively supervising them or communicating with their clients. To ward off that risk, Moakler says, dealer firms should have another level of oversight when an advisor makes a change in sensitive fields within their records.

“I think dealer firms just need further investments to make sure that calls are going out and connecting with clients, to make sure the client isn’t being taken advantage of,” he says. “I blame this on IPC more than the advisor, because IPC should have the checks and balances in place to protect the client.”

In a statement to Wealth Professional, Andrew Papini, VP Compliance at IPC, said the firm “[does] not condone behaviour like this and take this type of misconduct very seriously.

“All firms and advisors owe a duty to act fairly, honestly and in good faith to their clients,” he continued. “It is a critical obligation that underpins the relationship we and our advisors have with all our clients.”

Papini underscored that at the time of Marrone’s misconduct, IPC had measures in place to ensure clients’ interests are put first, and took appropriate steps once his actions came to light.

“We fully agree that firms are responsible for having measures in place to ensure … client dealings are of high ethical standards,” he added. “In our view this responsibility is heightened for senior and vulnerable clients.”

He highlighted IPC’s continued commitment to its senior and vulnerable clients, and said it has a robust framework to ensure they’re protected adequately.

“We take proactive measures to educate and inform advisors of the issues that commonly impact these clients and how an advisor can help protect a client’s interests,” he said.

In the wake of the decision, Ken Kivenko, president of investor advocacy group Kenmar Associates, urged a review of CFR provisions regarding the ability of salespersons to act as trustees and executors.

“’Seniors advocates should go on alert status given this OSC Tribunal decision,” Kivenko added. “Whatever happened to the dealing fairly, honestly and in good faith provisions of the Ontario Securities Act?”