The Double Standard for Wealth Advisers

03/18/2010 05:12 am ET | Updated May 25, 2011

aka Runaway Stockbrokers

Informant Says He Will Assist Further in Tax Case Against Swiss Bank

Bradley Birkenfeld is the wealth adviser who blew the whistle at UBS. He's the guy who carried a toothpaste tube loaded with diamonds through airport security, hiding undeclared client assets from the IRS and charting a course you can't make up. Later, he described UBS as a "massive machine" of tax evasion.

Birkenfeld, according to The New York Times, is "cooperating" further with authorities. No doubt he'll give up more client names and describe UBS as an enabler of tax cheats. He hopes to postpone his prison term and reduce the 40-month sentence. I understand Birkenfeld's desire to spend less time in jail, but the story raises a bigger question:

Why isn't there a wealth adviser-client privilege?

You know the legal concept I mean. Communications between lawyers and clients are confidential. One idea behind this privilege, I think, is that it encourages open discussion. And in turn, the honest dialogue promotes civil obedience. Lawyers counsel clients against breaking the law.

Or how to skirt the fine judiciary edges of self interest.

Here's the problem. Attorneys, especially those practicing trust and estate law, cross into the field of wealth management. They demonstrate how trusts reduce estate taxes and increase protection from creditors. They discuss tax-exempt municipal bonds. And often, they opine on fundamental questions about asset allocation, like the appropriate level of risk for children's portfolios. These are all issues I addressed as a financial adviser (now as a wealth blogger). But attorney discussions are privileged. Mine aren't.

How does a double standard serve the public interest?

Let's put illegal activities aside for the moment. As a stockbroker in New York, I sometimes counseled clients who were moving to tax friendly states like Florida. As soon as anyone said, "Statutory residency," or mentioned New York's 183-day litmus test, I hit the brakes.

I usually replied, "It's better we don't discuss tax strategies. Anything you say is subject to subpoena."

Yikes. However forthright--it's hard to win trust while reading clients their financial Miranda rights. And the lack of privileged communication, at some level, undermines wealth management. The first and most golden rule of any financial adviser is "know your client." This guideline is the mainstay of the Series 7, which similar to the "bar" for lawyers, enables stockbrokers to buy and sell securities. I don't get the double standard. In effect I was saying, "It's not that I didn't want to know. I can't know. Go see your lawyer. It's safer."

But financial advisers are paid to protect wealth.

Now, let's take the Birkenfeld case to an extreme. Questions linger whether Birkenfeld is entitled to a 30 percent whistleblowers reward, worth millions given the potential recoveries from UBS clients. The reward seems unlikely because he broke the law. But what if Birkenfeld knew about his department's activities and stayed clean?

The 30 percent reward encourages law-abiding advisers to turn in their clients. This incentive structure may promote the interests of public policy. But I really don't understand why lawyers, if you will excuse the analogy, sit in the front of the bus. How long will it be before somebody writes a Grisham-like novel, shades of the The Runaway Jury, in which a "runaway stockbroker" stalks clients for 30 percent rewards? Or as is often the case, fact precedes fiction and we read headlines about financial bounty hunters? So much for trusted advisers.

Is this the incentive structure we want for people managing our money?

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