Your Client Asked You to Serve as Their Trustee. Here Is Why to Say No.

Being asked to serve as a client’s trustee can feel like one of the highest compliments an advisor can receive.

The client trusts your judgment. You understand the family. You already know the assets, the plan, and the people involved. From the client’s perspective, asking you to step into the trustee role may seem like the most natural choice.

For many advisors, however, accepting the appointment creates a new set of responsibilities that can be difficult to reconcile with the advisory relationship.

The issue is not whether an advisor is capable of serving as trustee. It is whether taking on that role introduces conflicts, regulatory requirements, and liability that could have been avoided by separating the responsibilities.

For most advisors, a better solution is to remain in the investment role and work with a qualified corporate trustee.

The duty to beneficiaries can conflict with the advisory relationship

Trustees generally owe duties to all beneficiaries, not just the person who originally hired the advisor.

That distinction becomes important after a client’s death.

Consider a trust for two adult siblings. One sibling remains your advisory client and the other does not. If the siblings disagree about a distribution, the use of a family property, or another trust decision, you may be expected to act impartially as trustee while also maintaining a fiduciary advisory relationship with one of the beneficiaries.

Even when everyone begins with a strong relationship, family circumstances can change. Beneficiaries can disagree. Marriages, divorces, financial problems, and different expectations about distributions can create situations the original client never anticipated.

A corporate trustee creates separation between the investment relationship and those administrative decisions.

Trustee liability is different from advisory liability

Trust administration requires decisions that directly affect beneficiaries.

A trustee may have to interpret distribution standards, say no to a request, allocate expenses between income and principal, oversee unusual assets, coordinate tax reporting, or resolve disagreements among beneficiaries.

Even a reasonable fiduciary decision can be challenged.

That exposure may also fall outside the scope of an advisor’s existing errors and omissions coverage. Before accepting an appointment, an advisor should understand what liability protection is available and whether additional coverage is necessary.

Serving as trustee may create additional custody requirements 

This is one of the regulatory considerations advisors may not expect.

A trustee generally has legal authority over trust property and may have the ability to make distributions or otherwise move assets. Depending on the facts and the advisor’s regulatory status, serving as trustee can cause the advisor to be treated as having custody of client assets. For SEC-registered investment advisers, custody can trigger additional compliance requirements under Rule 206(4)-2

The important point is that the compliance analysis should happen before the appointment is accepted, not after the advisor is already responsible for the trust.

Registered representatives may have additional FINRA requirements

For advisors who are registered representatives, FINRA Rule 3241 adds another consideration.

The rule generally requires a registered person to provide written notice to the firm and receive written approval before serving as a customer’s trustee, executor, power of attorney, or in another similar position of trust, subject to certain exceptions such as immediate family relationships.

The firm must then evaluate the arrangement and any potential conflicts. Some broker-dealers may prohibit these appointments as a matter of internal policy.

For an advisor considering a trustee role, compliance should be part of the conversation from the beginning.

Serving as trustee may create a compensation conflict

A trustee has a fiduciary obligation to act in the interests of the trust and its beneficiaries.

An investment advisor is also compensated for managing assets. If the same person serves as trustee and investment advisor, those roles may create tension.

For example, a trustee may need to approve a significant distribution to a beneficiary. At the same time, an advisor compensated based on assets under management has a financial interest in keeping assets invested.

That does not mean the advisor will make an inappropriate decision. It does mean a beneficiary could later question whether the trustee’s judgment was influenced by the advisor’s investment program or compensation arrangement.

A similar issue arises when the trustee delegates investment management to the advisory firm with which the trustee is affiliated. The advisor may need to demonstrate that the investment arrangement, fees, and decisions were appropriate for the trust.

These conflicts can be managed in some circumstances, but they add considerable complexity to the fiduciary role.

A better answer may be to separate the roles

Declining the trustee appointment does not mean stepping away from the client or the family.

In many cases, it allows the advisor to remain focused on the investment program for the family while bringing in a fiduciary partner for trust administration.

Certain structures can accomplish that.

Name a corporate trustee and keep the advisor in the investment role. In a directed trust, the investment advisor can be named in the trust document while the corporate trustee handles administration and other fiduciary responsibilities.

Consider another defined fiduciary role. Depending on the trust and governing law, a trusted professional may be able to serve as a trust protector or in another limited role rather than taking on the full responsibilities of trustee.

The right structure depends on the client, the trust document, applicable law, and the advisor’s regulatory environment.

Where Magnolia fits

Magnolia Trust Company serves as an independent corporate fiduciary focused on providing trust services and trust administration. We do not manage investments.

For advisors, that distinction matters. Referring the trustee role to Magnolia does not require giving up the investment relationship. Instead, we work alongside the family’s existing advisors, attorneys, CPAs, and other professionals.

Depending on the plan, we can serve as:

• Sole trustee
• Directed trustee
• Co-trustee
• Successor trustee
• Trust protector
• Agent for trustee

If a client has asked you to serve as trustee and you are evaluating the best way to respond, we are happy to talk through the options with you and your client’s other advisors.

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Content on this site is for informational purposes only and is not legal, tax, or investment advice. Please consult your own professional advisors regarding the appropriateness of any trust or planning solution for your specific circumstances.