Among the rule proposals suggested by the Division of Professional Registration to the State Board of Embalmers and Funeral Directors was the following definition of “External Investment Advisor”:
any licensed, qualified investment advisor approved and authorized by the trustee of the preneed trust and who holds no personal interest in any assets of the preneed trust and has no financial relationship, business or personal, with any person or entity who has any relationship, business or personal, with the preneed seller such as to create or give the appearance of showing a lack of independence.
The definition reflects the Division’s intent to establish a Chinese Wall between a preneed seller and any independent financial advisor (external investment advisor) retained by the preneed trustee. As background, Section 436.440 of SB1 was probably sought by Missouri Regulators to preclude preneed trustees from using financial advisors independent of the bank. (We explained this in the blog post titled “Regulating out of context”.) The Missouri funeral directors association countered that section with legislation that amended Section 436.445 to add “external investment advisors” to the permissible agents that a trustee could retain as an agent. So now, the Division seeks to counter that legislation with a rule proposal.
For reasons discussed in “Preneed Fund Manager: Is your O&E coverage current?” and “The Zeal for Independence: The NPS Investment Advisor”, we believe the Chinese Wall approach is short sighted and inappropriate. As an agent of the trustee, it can be argued that the investment advisor assumes a fiduciary duty to learn the ‘client’, and as discussed in the referenced blog posts, that includes the seller. If a trustee and the investment advisor desire to document investment policies with the seller’s consent, would that represent a business relation, or a lack of independence?
The definition is not only vague and ambiguous, it is also inconsistent with the Uniform Trust Code. With the engagement of an independent investment advisor, the trustee may want to include the seller as a party to the advisor’s engagement agreement. That agreement can then define their mutual duties with regard to disclosures and investment objectives.