A close friend of mine in the industry had been an independent financial adviser for decades. He worked hard to build a strong business, made a great living and, most importantly, helped hundreds of clients and their families reach their financial goals and dreams. One day it all came perilously close to crashing down, all at once — and all due to an innocent verbal comment.
Over a casual social dinner, a client briefly mentioned a potential real estate investment he was thinking of making on his own — with no involvement whatsoever on my friend’s part — and asked in passing what my friend thought of the potential investment. Without thinking too much about it, the financial adviser responded that it sounded reasonable and the conversation quickly turned to another topic.
This passing exchange, however, became problematic when the investment turned sour a few years later. The client sued him, alleging bad advice — even though my friend never made any money from the transaction and was not involved in any way. Unfortunately, those details made no difference. In the resultant regulatory process, my friend ended up almost losing his Finra registration, which meant he very nearly lost everything: his business, his livelihood and all his client relationships … it had all been jeopardized by one unwitting mistake.
If this scenario sounds extreme to you, that’s because it is. It’s also true, however, and financial advisers across the country are putting their businesses at serious risk everyday by making similar gaffes. There’s typically no malice or ill intent, just momentary thoughtlessness with no monetary gain to the adviser.
So this begs the question: how much is your registration worth to you? For many successful independent advisers, a securities registration is extremely valuable, after factoring in yearly production figures and what the book of business could capture on the open market. With this in mind, when it comes to managing compliance and other risks, advisers should take the following approach:
• Rely on your broker-dealer for compliance support. Given today’s increasingly complex and ever-changing regulatory environment, it’s nearly impossible for advisers to shoulder their compliance responsibilities alone. Nor should you try. If you’re not sure about something, ask your broker-dealer’s compliance department. While some advisers may think this approach is tedious, it’s the smart thing to do and a worthwhile investment of your time. Arbitration hearings are an unfortunate reality in this business, and if an adviser comes armed with highly detailed notes, it’s often the difference between winning and losing a case. If your current broker-dealer doesn’t offer such tools, think very seriously about aligning with a broker-dealer that does.
• Be in the know at all times. As an adviser registered with the Financial Industry Regulatory Authority Inc., you are expected to know what your regulatory and compliance responsibilities are. You have taken — and passed — countless exams and have ongoing continuing education obligations, but it’s impossible to know too much about compliance and regulatory issues. To boost your level of knowledge, consider getting involved with industry organizations such as the Financial Services Institute Inc., which is a specialized-subject-matter expert concerning a wide range of regulatory issues affecting the independent financial services space. Also, be sure to subscribe to and review industry media publications, along with Finra’s monthly disciplinary action report to better understand how to avoid behaviors that are or could be easily construed as violations. These steps not only will help to protect your business but will shield your clients as well, since many compliance issues deeply affect them, positively or negatively.
• Always be vigilant about what you say and how you say it in any client interaction. Always have your adviser hat on. Anytime you are talking about an investment or personal finances either at a party, on the golf course or at dinner with a friend — whether you are getting paid or not and whether you have any formal involvement or not — always be aware of your compliance responsibilities, along with the potential consequences. Even seemingly harmless and inadvertent verbal slip-ups can cost you your ability to do business. When you are in the office or meeting with clients on official business, think before processing each client transaction, no matter how small or routine. It may be something you have encountered hundreds or thousands of times, but it’s still worth contemplating thoroughly. Can you easily explain the transaction on the witness stand or during an arbitration hearing? If not, then it’s just not worth losing your registration over it.
• Stay mindful of overlapping client and family relationships. Conflict of interest rules apply to family as much as any other type of client. This often means that common and otherwise harmless personal financial transactions between family members are impermissible once it overlaps with a professional advisory relationship. For example, if your parents are clients, you may be restricted from helping to pay for their long-term-care needs, since this could be considered a gift. Also, many parents give their adult children money to make a down payment on a home. Regulations governing advisers, however, may restrict or prohibit this type of payment. Advisers should have any such payments fully vetted and documented and should always bring these types of issues to the compliance department.
• Eliminate potential bad actors. You don’t have to work with everyone that walks through the door. Just as not every investor is suited for every investment product, not every investor may be a valuable or rewarding client for every adviser. While the overwhelming majority of retail investors simply want to save for retirement and protect their families, bad actors exist. How do you spot them? Watch for signs of unrealistic expectations. During the first client-engagement meeting, for instance, an individual might say they need income and encourage you to pursue more aggressive offerings. Later, however, that same individual might claim they wanted growth alone — and then you find yourself in an arbitration hearing (which again, also underscores the importance of documenting every client conversation). While it’s difficult to fully screen every client, if they have unrealistic expectations at the outset, it’s probably best to move on to the next opportunity. No one likes to lose revenue, but it’s not worth risking your business for one client.
It is easy to definitively answer the question of how much your Finra registration is worth — a great deal. Your approach to risk management and compliance should reflect that reality.
Ultimately, advisers need to think long and hard about what would happen if they were barred by Finra and had to leave the industry. What would they do? And would they earn anything close to what they do now? That’s why it’s important to protect your registration like you would protect your family or your clients’ family, because in many ways that’s precisely what you are doing.