UPDATES & ANALYSIS

Intended Beneficiaries Can Sue Financial Advisors for Failure to Carry Out Client’s Wishes

by Ryan Koopmans | December 27, 2013

By Ryan Koopmans

Today the Iowa Supreme Court ruled that financial advisors have a duty to their clients’ intended beneficiaries, and that the beneficiaries can hold the advisors liable for failing to exercise reasonable care in implementing their clients’ wishes.

The case involved a financial advisor who was actively involved in the client’s estate planning – recommending certain trusts, transferring assets to the trusts, and even serving as a fiduciary under the client’s will and trusts.  In 1999, with the financial advisor’s assistance, the client created a revocable trust and transferred his house, among other assets, to the trust.  In 2003, again with the advisor’s assistance, the client revised his estate plan by, among other things, executing a will that left his house to a close friend.  The financial advisor was involved in both estate plans, but the second plan was actually drafted by a different lawyer than the one that prepared the first plan.  In 2003, the advisor failed to notify the new attorney that the client had a revocable trust, let alone that the house was owned by the revocable trust, not by the client directly.  The 2003 plan did not include revoking or de-funding the revocable trust.  Therefore, when the client died in 2006, the house passed according to the terms of the revocable trust, and not according to the new will.

The intended beneficiary of the 2003 will sued the 2003 lawyer and the financial advisor for negligence.  The district court granted the advisor’s summary judgment motion, holding that to create a duty of financial advisors to beneficiaries of a client’s estate or trust would lead to “divided loyalties” and “encourage [the advisor] to practice law without a license.”

The Iowa Supreme Court reversed, holding that such a duty does exist as to “direct, intended and specifically identifiable beneficiaries.”  The decision was grounded largely on the Court’s previous rulings, which have held that attorneys and insurance agents owe a duty to their clients’ intended beneficiaries.  The Court noted that the financial advisor “was clearly [the client’s] agent in certain respects,” and “[w]e see no reason to treat one kind of agent differently from another.”  The opinion is here.