Why advisors must avoid taking on these forbidden roles for clients

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Advisors may be a logical choice to serve as a client’s executor or power of attorney, but doing so creates a major conflict of interest – and regulators are taking notice.
One case highlighted in the Canadian Investment Regulatory Organization’s (CIRO) newly released Enforcement Report for 2023–2024 concerns a representative of a mutual fund dealer who accepted the appointment as power of attorney for property and executor and trustee of a client’s estate, as well as appearing in the client’s will as a beneficiary. The rep failed to disclose any of this to her dealer.
“This was a situation in which an advisor was friends with the client, and the client was elderly, had memory issues, and therefore, in our view, was vulnerable,” says Charles Corlett, CIRO’s vice-president of enforcement.
“Advisors, when they’re placed in these potentially significant conflicts of interest, should always be open and transparent and looking to disclose that and discuss it with the firm for which they work,” he adds.
The CIRO hearing panel fined the advisor $125,000, ordered her to pay $20,000 in costs, and issued a permanent prohibition from conducting securities-related business for any mutual fund dealer member of CIRO.
The case underscores how important it is for advisors to steer clear of taking on the power of attorney, executor, trustee and beneficiary roles for clients. And if it happens without the advisor’s knowledge, they should inform their supervisor and compliance team as soon as they find out.
Mr. Corlett says even though there’s no specific rule enforced by CIRO that says an advisor cannot be a client’s beneficiary (there is a rule prohibiting serving as power of attorney for property, executor or trustee), advisors “have an obligation to disclose that fact.”
FP Canada recently introduced a rule of conduct that prohibits certified financial planners and qualified associate financial planners from acting as a client’s power of attorney for property, executor or trustee, or being knowingly named as a client’s beneficiary, while providing that client with financial planning services.
There’s an exemption when the client is an immediate family member or the financial planner has a day-to-day job that entails administering trusts or serving as an executor (perhaps because the financial planner works for a trust company).
“We’ve long considered it to be a conflict of interest to act as both a financial planner and in one of those other capacities,” says Damienne Lebrun-Reid, vice-president of standards, certification and enforcement at FP Canada. But the certification body has “continued to see complaints that involve this type of conflict specifically.”
She explains there’s an inherent problem when financial planners take on multiple roles with different goals. For example, a financial planner providing estate-planning services may run into a conflict of interest if the client’s goal is to enjoy most of their assets while alive and leave little to their beneficiaries, but the financial planner is a beneficiary.
Under the FP Canada rule, accepting any of these roles requires the financial planner to stop providing financial planning advice or services to the client’s estate. Furthermore, FP Canada will presume knowledge where it feels the certificant “knew or ought to have known, or could have reasonably discovered” that a client had appointed them to one of these roles.
As Ms. Lebrun-Reid points out, financial planners often see copies of powers of attorney and wills as part of the financial planning process.
To educate clients so these appointments don’t happen, she recommends that financial planners explain their professional obligations, the rules they follow, and how they make sure they always act in a client’s best interests explicitly – with an important facet being avoiding conflicts of interest.
“The proactive approach is better,” Ms. Lebrun-Reid says. “We’re not looking to catch people doing something wrong. We’re looking to ensure Canadians are protected.”
Ellen Bessner, partner at Babin Bessner Spry LLP in Toronto, says in her experience as a litigator, some advisors run afoul of these rules inadvertently.
From a client’s perspective, the advisor is often the most logical choice as power of attorney, executor or trustee because they’re trusted, good with money and an expert at planning. Advisors who take on a forbidden role may have their hearts in the right place, imagining they’re doing the client a favour. However, there are often consequences even without intent to do harm.
“They’re still penalized because it’s still a breach. They could even lose their jobs. Their dealer could say, ‘Look, we realize you made a mistake here, but we’re not going to sponsor your licence anymore,’” she says.
“It’s a clear conflict of interest. If they’re able to be the power of attorney and the executor as well as the advisor … they have access to the client’s money and full authority to do what they want, with no checks and balances.”
Advisors who discover they’ve been named to these roles after the fact must seek immediate guidance from their firm’s compliance department, Ms. Bessner says.
The solution might be to turn down the role or to move the client’s account to another advisor – and, if the file goes to a colleague chosen by the advisor, the firm must supervise to ensure the colleague is acting independently of the previous advisor, who is now the attorney for property or executor.
“Dealers need to be very proactive and watch the accounts of senior clients because the potential mistakes and substantial exposure can be enormous,” she notes.
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