Financial Advisor Owed No Fiduciary Duty (PA)
June 6, 2013
The Pennsylvania Supreme Court recently considered whether a fiduciary duty arises when a person with superior knowledge advises another with respect to financial products. In <a href="http://blog.wcmlaw.com/wp-content/uploads/2017/07/Yenchi-v.-Ameriprise.pdf">Yenchi v. Ameriprise Financial, Inc.</a>, the court found no fiduciary duty where the clients made the ultimate investment decisions in the absence of a traditional controlling and overmastering relationship.
Bryan Holland made an unsolicited cold call to Eugene and Roth Yenchi in 1995, asking to meet them regarding their “financial stuff”. At the initial meeting, Yenchi informed Holland that he had a long term disability policy, which Holland later reviewed and asked Yenchi to keep because he couldn’t offer a comparable product.
Subsequently, Holland presented the Yenchis with a financial management proposal, which contained a notice that it had been prepared by "your American Express financial advisor" (Holland) and that "at your request, your American Express financial advisor can recommend products distributed by American Express Financial Advisors and its affiliates as investment alternatives for existing securities." The Proposal offered the Yenchis a number of general recommendations, including that they monitor monthly expenses, consolidate their debt, consider various savings plans, consolidate current life insurance policies into one policy, review long-term care coverage, keep accurate records for tax purposes (medical expenses and charitable contributions), transfer 401(k) funds into mutual funds, and continue estate planning with an attorney and their financial advisor. The Yenchis implemented some of these recommendations, saving money in an investment certificate and opening an IRA account.
Additionally, the Yenchis purchased a whole life insurance policy with an initial death benefit of $100,000 plus a $25,000 rider for Ms. Yenchi, paying for it by cashing out Yenchi’s five MetLife policies to make the initial payment. In 1997, Ms. Yenchi used the proceeds from her two MetLife policies to purchase a deferred variable annuity. In 1998, Holland proposed that Yenchis increase their coverage to $300,000 but they rejected Holland’s advice.
In 2000, the Yenchis had their portfolio independently reviewed and were advised that their financial portfolio was not as Holland represented- the 1996 policy was underfunded, destined to lapse and additional premium rates would have to be paid over time. Additionally, Ms. Yenchi’s deferred variable annuity would not mature until 2025 when she was eight-four.
The Yenchis initiated suit in April 2001 against American Express and Holland, alleging claims of negligence/willful disregard, fraudulent misrepresentation, violation of the Uniform Trade Practices and Consumer Protection Law ("UTPCPL"), 73 P.S. §§ 201-1-201-9.3, bad faith, negligent supervision, and breach of fiduciary duty. Among other things, the Yenchis claimed that a confidential relationship existed with Holland because he held a “vastly superior” position in terms of knowledge- highlighting that they were only high school educated while Holland is college educated with a CPA and securities and insurance licenses.
The Supreme Court of the Western District robustly analyzed the different scenarios in which a fiduciary relationship could be created- specifically requiring a relationship of confidence in which the client cedes decision-making control to the other party. Conversely, even where special vulnerabilities exist, this Court has not recognized the existence of a confidential relationship if the person continued to act on his or her own behalf and did not succumb to “overmastering influence” of another.
The Court concluded that the record fell short of establishing a fiduciary relationship with Holland because fiduciary duties “do not arise merely because one party relies on and pays for the specialized skill of the other party. Its just not enough. The superior knowledge or expertise does not impose a fiduciary duty or otherwise convert an arms length transaction into a confidential relationship. "[T]he critical question is whether the relationship goes beyond mere reliance on superior skill, and into a relationship characterized by 'overmastering influence' on one side or 'weakness, dependence, or trust, justifiably reposed' on the other side," which results in the effective ceding of control over decision -making by the party whose property is being taken. The court concluded that the case at bar presets an arms length transaction in which the Yenchis accepted Holland’s advice with respect to the purchase of the policy and decided to reject other products.
Thanks to Sathima Jones for her contribution.
For more information, contact Denise Fontana Ricci at <a href="mailto:firstname.lastname@example.org">email@example.com</a>.