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Financial Planners Beware

Business, Finance, Planning, Strategy, Gears

August 8, 2020
Michael Salad, Esq. | Craig Panholzer, Esq.

In the world of e-mails and text messages, financial planners are often pressed to answer their clients’ questions immediately.  Referrals and client retention are the lifeblood of financial planners.  As a result, financial planners may unknowingly extend themselves beyond ethical and legal thresholds.  This article provides financial planners with insight into the ramifications of providing clients with guidance outside of a financial planner’s area of expertise. The goal of this article is to caution financial planners and encourage them to enhance their working relationships with professionals in other fields, such as attorneys and certified public accountants.

An “investment adviser” includes any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or  the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. 15 U.S.C. § 80b-2(a)(11). Under 15 U.S.C. § 80b-6(4), it is unlawful for a financial planner to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. Financial planners who willfully violate any of the aforementioned statutes are subject to fines of up to $10,000, imprisonment for not more than five years, or both. 15 U.S.C. § 80b-17.

Financial planners occasionally provide tax planning advice with benevolent intentions but fail to understand the implications of doing so. A review of numerous financial planners’ marketing literature revealed that financial planners regularly offer advice beyond their legal scope without realizing that they are doing so. Financial planners may unwittingly recommend tax plans that are deemed to be abusive tax shelters under 26 U.S.C. § 6700, erroneously advise clients to transfer assets into a trust, provide advice regarding charitable trusts or claim excess dependents. Some financial planners cloak this advice as being suggested by estate planning attorneys. However, citing and referencing illusory attorneys is insufficient to circumvent unauthorized practice of law regulations in many jurisdictions throughout the United States. 

For instance, in Trumbull County Bar Ass’n v. Hanna, 684 N.E.2d 329, 331 (Ohio 1997), the Supreme Court of Ohio found a financial planner’s actions exceeded asset investment and management advice after the planner recommended an inter-vivos trust and answered questions about the trust.  In Committee on Professional Ethics & Conduct etc. v. Baker, 492 N.W.2d 695, 697 (Iowa 1992), a financial planner presented seminars with a licensed attorney who was a trust officer at a bank.  The financial planner and attorney touted living trusts as an estate planning tool. The financial planner and the attorney subsequently convened meetings with prospective clients to discuss estate planning strategies. Id. The meetings often included discussions about marital trusts, family trusts and generation-skipping trusts. Id. The financial planner created diagrams outlining how a will operates so that prospective clients may understand the difference between a living trust and a will. Id. The financial planner and the trust officer subsequently referred clients to an estate planning attorney who prepared estate planning documents. Id. The Supreme Court of Iowa held that the financial planner engaged in the unauthorized practice of law by advising clients which estate planning documents they needed and how the documents needed to be tailored to meet their needs.  Id. at 702. 

Additionally, courts throughout the United States have held that a financial planner’s clients are purchasers of goods or services. As purchasers, clients are heavily protected by deceptive trade laws.  In E.F. Hutton & Co. v. Youngblood, 708 S.W.2d 865 (Tex. Ct. App. 1986), a brokerage firm was liable to a client under the Texas Deceptive Trade Practices Act after a planner advised the client that the client would not incur adverse tax consequences by withdrawing funds from a competing brokerage firm and reinvesting the funds with the planner’s brokerage firm.

Similarly, in Maese v. Garrett, 329 P.3d 713, 720-21 (N.M. Ct. App. 2014), a financial planner’s advice regarding the tax consequences of withdrawing funds from an annuity was deemed interrelated with the investment advice that the financial planner provided.  As such, the financial planner violated the New Mexico Unfair Practices Act and was responsible for the tax liability that the client incurred.  Financial planners are generally not relieved from liability after providing tax advice to clients, even if the tax advice was not an integral part of the initial representation and occurred in connection with the commercial relationship for which a financial planner is compensated.

Courts have historically allowed clients to recover damages from financial planners who provide misleading tax advice. A client may recover the tax liability caused by negligent or wrongful tax advice. See Eckert Cold Storage, Inc. v. Behl, 943 F. Supp. 1230, 1234 (E.D. Cal. 1996) (stating that plaintiffs may be entitled to damages due to the tax liability if the liability was caused by negligent or fraudulent advice and would not otherwise have been incurred); Deloitte, Haskins & Sells v. Green, 198 Ga. App. 849, 853-54 (Ga. Ct. App. 1991) (concluding that the plaintiff would not have incurred the tax liability but for the negligent advice and was thus entitled to claim as damages the unanticipated tax consequences from the sale of a business).

Many financial planners feel pressure to provide guidance to clients outside of their comfort level to maintain strong client relations. Other financial planners make representations related to their qualifications that may not be completely accurate. In Scott v. Bodor, Inc., 571 N.E.2d 313, 316-17, 324 (Ind. Ct. App. 1991), a financial planner provided tax advice and had a working relationship with a client for two years prior to the events at issue.  The financial planner referred the client to another financial planner who claimed to be a “specialist” in tax planning. Id. at 317. The financial planners induced the client into executing a supplemental income tax plan in which the planners advised the client that the plan had two features which were extremely important to the client: A corporation owned by the client will receive an immediate income tax deduction for funds contributed to the plan and the corporation may access the funds that it paid into the plan at any time. Id. The client desired not to enter into the plan if it was primarily a life insurance vehicle. Id. The planners misrepresented the plan and insisted that it was primarily an investment vehicle with a small life insurance component, which was inaccurate; the planners knew that the plan was to be funded exclusively through life insurance. Id. The Court of Appeals of Indiana held that the planners made unqualified statements concerning the tax-deferred nature of the plan and the planners’ legal misrepresentations to the client were based on factual misrepresentations that constituted fraud. Id. at 324. 

Client trust is paramount. Financial planning involves a level of intimacy that is virtually unmatched amongst other professions. A financial planner’s transparency and ability to seamlessly refer clients to other professionals often enhances that trust.  The majority of financial planners are cognizant of these traps.  This article is intended to shield financial planners from unknowingly running afoul of the heavy regulation that planners endure.

Michael Salad is a partner in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on estate planning, business transactions, mergers and acquisitions, tax matters and cyber risk management. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in New Jersey, Florida, New York, Pennsylvania, Maryland and the District of Columbia.  Michael may be reached at (609) 572-7616; (954) 889-1850 or via e-mail at msalad@cooperlevenson.com.


Craig Panholzer is an associate in Cooper Levenson’s Business & Tax and Cyber Risk Management. He concentrates his practice on estate planning, probate, business transactions and tax matters. Craig may be reached at (954) 889-1856 or via e-mail at cpanholzer@cooperlevenson.com.

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Financial Planners Beware

August 8, 2020Michael Salad, Esq. | Craig Panholzer, Esq. In the world of e-mails and text messages, financial planners are often pressed to answer their

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