Cozy Broker-Client Relationship May Cause Conflict-of-Interest Problems

Q: My elderly aunt was recently widowed and left about $6 million in accounts invested with the brokerage house that she and her late husband patronized for years. She told me last week that in the days immediately after my uncle’s death, she was advised by her attorney to give her power of attorney for handling her financial affairs to her broker.

Furthermore, she told me that she has since given him a personal loan (no collateral) of $75,000 on which he makes regular, if overdue, payments of interest. Who knows when the principal will be repaid! Anyway, I am concerned for her and for the safety of her considerable assets. Should I be? And if so, what should I do about it?

--M.H.

A: At the very least, you should urge your aunt in the strongest possible way to immediately transfer her power of attorney to someone else and to call in the loan. Even if no laws have been broken directly, the broker-client relationship you have described is too cozy and ripe for conflict-of-interest abuses.

Brokerages generally forbid their brokers and financial consultants from lending money to or borrowing from clients and from accepting “full discretionary authority” over a client’s portfolio.

Such internal rules make a great deal of sense, both from the consumer’s perspective and that of the brokerage. It doesn’t take much to imagine what could happen to your aunt’s portfolio in a worst-case (or just bad-case) scenario, given the amount of latitude she has given her broker.

“The same common-sense rules about lending money to friends and others apply here as well,” says Michael Jones, vice president of the Office of Individual Investor Services of the National Assn. of Securities Dealers, which regulates brokers and their activities. “When it comes to lending money, it’s best to keep an arm’s-length relationship with professionals with whom you do business, brokers included.”

If you want to get more involved--and this might be a wise thing for you to consider--you could urge your aunt to terminate her relationship with the broker and to find someone who respects the professional distance that should be maintained between broker and client.

If you want to take it further, you could report the broker to the compliance officer at the brokerage’s branch office or its national headquarters. (On your behalf, I have already contacted the national office, and it is eager to hear directly from your aunt.)

Finally, you might want to consider the wisdom of the advice your aunt is getting from her attorney. If the facts are as you have related, your aunt’s attorney did her no great service in recommending that she give her power of attorney to her broker.

If your aunt is worried about finding another broker whom she can trust, she could get recommendations from friends and then--perhaps with your help--interview the brokers to find the appropriate one, the NASD’s Jones suggests.

Among the matters Jones suggests probing are employment history, educational background, type of investments being recommended and, most important, how the broker is compensated (commissions, salary or combination of both?).

Before making your selection, you can check on a broker’s disciplinary history by contacting the NASD at (800) 289-9999 or going through the Internet at https://www.nasdr.com

The NASD accepts complaints against brokers at its 11 district offices in the United States. In Southern California, the office in Los Angeles may be reached by calling (213) 627-2122. You can also file a complaint through the Internet at the NASD’s Web address listed above.

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Q: I need to get a copy of a previous year’s tax return from the Internal Revenue Service. How do I do this? Is it free?

--D.S.

A: The first step is to get IRS Form 4506, which is available at local IRS offices or by calling the IRS special-forms order line at (800) 829-3676. The IRS says it can take up to 15 working days to receive the form when ordering by phone. The form is also available for downloading from the Internet at the IRS’ Web site (https://www.irs.ustreas.gov)

After getting Form 4506, you will see that you can order either complete copies of individual tax filings or a transcript. The complete copies cost $23 each; the transcripts, essentially abstracts of the filings containing most of the pertinent information, are free.

Transcripts are usually sufficient, the IRS says, if you need the return for a mortgage application, student loan or Small Business Administration loan. However, some mortgage brokers contend that home loan makers want a full return, so to be on the safe side, you should get the full copy.

But here’s the downside: It can take up to 60 days for the IRS to return a copy of your tax form. If time is of the essence, you’d be wise to put in your request quickly. You might also submit material from the transcript to your potential lender while waiting for a full copy of your return.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail carla.lazzareschi@latimes.com