Professional advisers should stay in their lane | Darren Coleman
Tuesday, October 01, 2019 @ 2:27 PM | By Darren Coleman
As people’s financial situations become more complex, the need for comprehensive advice arises for legal, tax and investment matters. Unfortunately, this complexity can tangle up a professional adviser — on any or all of these fronts — into giving commentary outside the limits of their expertise.
I am a wealth management adviser and tend to leave legal matters to lawyers and tax issues to accountants, but as one with cross-border expertise I can offer advice, as can lawyers and accountants, on financial matters. But professional advisers should only give advice within their own purview and include other professionals as necessary.
Enter Betty. In 1998, my client Betty had over 20,000 shares of BCE and Nortel each. She was a retired Bell Canada employee who had acquired her shares over more than 30 years of employment. Betty did not live a lavish lifestyle but what she did well was save and all her savings went into her employer’s stock.
In 1999, her portfolio was worth over $6 million, most of it deferred capital gains. Not only did she have no plans to spend the funds but had saved over 80 per cent of her dividends! As there was no ability to donate shares and avoid the capital gains tax as there is today, she kept her shares rather than gifting them to charities.
It made sense for Betty, now retired, to diversify her portfolio and reduce her overall risk, but she was reluctant to pay the tax to do that. We recommended a strategy of “equity monetization” which would let her hedge the position on a tax-effective basis and provide her with funds to diversify her portfolio into other areas.
Betty would have fixed her Nortel position at $122 and her BCE position at $145 with forward contracts and the bank would have loaned her over 90 per cent of the proceeds over a five-year basis. This was a large transaction and the strategy was new to retail investors, so my employer, a large bank-owned investment dealer, asked Betty to obtain independent legal advice to ensure she was aware of how the strategy worked and the paperwork was proper.
At a meeting with her lawyer, I explained the strategy and the lawyer advised Betty not to do it. Our strategy met Betty’s need to reduce her risk exposures, effectively eliminating her positions in Nortel and BCE without selling them and triggering a multimillion-dollar tax bill. True, if the stocks went higher, she would trade away upside growth for the security derived from our strategy. But her lawyer thought Nortel was going higher and Betty would leave money on the table.
I said the lawyer had given an investment opinion rather than a legal opinion, so the lawyer backtracked and told Betty to ignore what had been said. But the damage was done and Betty was scared off our strategy.
Over the next five years the value of her stocks fell dramatically to the point where her eventual estate was worth only a fraction of what it could have been. The difference to her eventual estate was over $4 million. She never pursued legal action against that lawyer but could have.
This was one experience where we had an accountant or lawyer offer investment advice outside their professional area. We recently had another with a family who used a Michigan-based lawyer to draft their late father’s will.
The father was a U.S. resident and his adult children resided in Canada. The lawyer’s estate-planning strategy used testamentary trusts to reduce the deceased’s estate tax and ensure his wishes were kept intact. But he neglected to consult with investment advisers in Canada or the U.S. to see if the strategy could be implemented.
My team is licensed and operational in both countries and knew that while the structure may be brilliant for Michigan estate law, it is not in compliance with rules for investment accounts in either country. The family has since engaged alternative counsel to see if they can find a way out. Meanwhile, a multimillion-dollar estate remains in limbo.
Lawyers and accountants often encounter situations where a financial adviser has also strayed out of their lane with inappropriate legal or tax advice. This is why professionals need to know their boundaries and when to summon other professionals.
In our practice, we hold client meetings with all of the person’s other professional advisers present. This ensures a full examination and analysis of the client’s situation. It also fosters a collegial atmosphere where all advisers work as a team for the client.
As baby boomers move into their 60s and 70s, and many have created their own wealth, we see more clients with complex affairs. Their situation requires the co-operation and co-ordination of highly skilled professionals from multiple disciplines. Maintaining a strong working relationship with complementary advisers and having a team approach is the winning combination for successful client relationships.
Darren Coleman is a senior vice-president with Raymond James in Toronto and one of Canada’s leading financial advisers. He is the author of RECALCULATING — Find Financial Success and Never Feel Lost Again.
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