Legacy Positions Are Fiduciary Work, Billable or Not

A client turns up with a concentrated position nobody planned for: a block of a closely held business, company stock still inside a lock-up, or inherited shares that carry sentimental weight and no tidy exit. Rich Chen, founder of Brightstar Law Group, writing as a guest on Kitces' Nerd's Eye View, opens from the awkward fact at the center of these relationships: an adviser can hold discretion over an entire portfolio and still be unable to sell the largest thing in it.

The temptation is to file that holding under peripheral, and Chen names the reason it happens — often the firm is not charging a fee on those assets. His piece is built to dismantle exactly that reasoning. A legacy position sits inside the advisory relationship whether or not it shows up in the billing calculation, and the federal fiduciary duty under the Investment Advisers Act of 1940 reaches it. That duty, which Chen splits into the familiar pair of care and loyalty, applies to advisers whether or not they are registered with the SEC. An agreement with the client can shape how far the obligations stretch, but it cannot waive them altogether.

What the piece asks for in response is a process, and the requirements are modest: thorough documentation, and consistent disclosure to the client of whatever is recommended about the position. Neither half is exotic. The difficulty is that both have to survive a client whose circumstances change, an adviser who leaves the firm, and an examiner reading the file years later with no memory of the conversation.

The traps Chen names are administrative rather than analytical, which is what makes them durable. Limited trading authority gets read as limited responsibility, and it is not — an adviser who cannot press the sell button still owns the recommendation to hold. Verbal understandings age badly: the okay given on a phone call, the reasoning nobody wrote down, the client who remembers the conversation differently years later. Documents drift apart, with an advisory agreement saying one thing while billing statements imply another. And an arrangement that was reasonable when it was established can turn problematic as a client's circumstances change, with no one returning to revisit it.

Chen's remedy is the cheapest item on the list and the one most often skipped. Present the client with the alternatives to continuing to own the position, he writes, and document that the presentation happened. That record, in his telling, is the adviser's best defense against both a regulatory examination and civil litigation.

Then there is the fee, which regulators read as a statement about the service. The test Chen flags is whether the charge is reasonable given the level of work being done, and the piece sets out a menu rather than an answer: exclude the legacy assets from billing entirely, keep billing while documenting the restrictions the client has imposed, or shift to an alternative structure such as a flat planning fee.

The first option looks like caution and reads, in a file, like absence. Waiving the fee does not waive the exposure — the firm still knows about the concentration, still advises around it, and is still there if the position goes badly. Nor does the discount buy much goodwill, since a client who is not billed for an asset rarely registers the forbearance as risk the firm is quietly holding. The logic runs better in the other direction. If there is genuine work in the position — presenting alternatives, documenting restrictions, coming back to the arrangement when circumstances change — then there is a service to price, and the invoice should say what the file says the firm did. Where the position truly sits outside the engagement, the documentation should be just as plain about that.

Read as a practice matter rather than a legal one, a legacy holding is a growth asset hiding in the compliance manual. Founders, executives past a lock-up, and heirs are the clients every RIA says it wants, and the first ninety days are where the concentration conversation either becomes a planning relationship or a permanent asterisk on it. Tax complexity, as this publication has argued, has replaced investment return as the adviser's visible edge, and the legacy position is where that edge gets tested before any portfolio construction begins. A firm with a documented sequence of alternatives, and a defensible fee attached to it, is selling something a competitor cannot lift from a website.

The conversation itself is hard, which is why so many firms route around it. Telling a founder that a position that may be the largest single exposure in the household's balance sheet is also the one thing the adviser cannot touch runs straight into what the client feels about the business, the family, and the inheritance — Chen's inherited-shares example exists because emotional value is a real input, not a soft one. An adviser who treats it as an input and records the answer has done the job the engagement actually describes.

The stakes outlast the client relationship. When a firm sells, the positions it never wrote down are exactly what a buyer's diligence team finds, and that is where the price moves. As this publication has argued about deal pricing, buyers discount post-closing contingencies rather than pay for them, and a concentrated, restricted, or illiquid holding inside a client's balance sheet is one of those contingencies.

Little of this calls for new software or another hire. Chen's sequence is unglamorous and it is the whole method: present the alternatives, write down what the client said, price the work that actually happened, and return to all of it when circumstances change. The fee line and the documentation should trace to the same decision, made in writing at the start of the relationship.