The Advisor's Professional Library

Client Communication and Miscommunication

January 1, 2012

1 Free Preview Remaining

You have used 1 of 2 free previews from The Advisor's Professional Library

It seems as if every expert from Dr. Phil McGraw to Dr. John Grey has said that communication is the key to a successful relationship. Communication is also a key requirement for successful advisory relationships, even when the client doesn’t have nearly as much money as Dr. Phil.

In his terrific book dealing with how to build better and deeper financial planning relationships with clients, Michael F. Kay quoted George Bernard Shaw. The Irish playwright said, “The single biggest problem in communication is the illusion that it has taken place.” Kay, the author of The Business of Life, adds that building client trust is dependent on consistently clear communication. Too many investment advisors are under the illusion that they are communicating effectively with clients. Unfortunately, many investment advisors may also be under the illusion that their communications are compliant.

Rule 204-2 under the Investment Advisers Act is more commonly known as the Books and Records Rule. The rule requires RIAs to retain originals of all written communications received and copies of all written communications sent by the RIA relating to:

  • any recommendation made or proposed to be made
  • advice given or proposed to be given;
  • any receipt, disbursement or delivery of funds or securities; or the
  • placing or execution of any order to purchase or sell any security.

As we will see in Books and Records Rule, an RIA may be asked to produce a broad array of books and records.

An RIA’s policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communications to clients, from clients, and about clients’ accounts. This rule of thumb also applies to electronic communications, including emails and messages sent using social media. And to comply with their fiduciary obligations, communications from RIAs to clients must be thorough, complete, and not misleading in any way.

Haste Makes Waste

Whether an IAR’s email is meticulously drafted or sent out while waiting for the light to change at an intersection, it may be subject to the retention requirements set forth in the Books and Records Rule. Though emails are not specifically mentioned in the Books and Records Rule, the retention requirements still apply. Furthermore, the SEC treats instant messages and text messages in the same manner as emails.

As we will see in Advertising Advisor Services and Credentials, it is often difficult to distinguish between a client communication and an advertisement. A March 1, 2004 no-action letter from the SEC to the Investment Counsel Association of America, Inc., stated that a written communication by an RIA to its existing clients is usually not an advertisement. Such a communication, however, may be viewed by the SEC as an advertisement if circumstances suggest its purpose is to offer additional advisory services or attract new clients. For example, suppose an email message asks clients to tell their friends about an RIA’s upcoming educational seminar. This communication must comply with advertising rules and regulations.

Compliance Obligations

An RIA’s CCO must review email regularly to determine potential violations of securities laws or the firm’s policies and procedures. Email communications should be spot-checked for indications of misconduct toward investors. Many firms use software to detect potentially non-compliant communications.

Electronic communications must be organized in a way that makes it easy for examiners to review any email requested. For example, the firm should be able to search for and retrieve all emails sent to and from a particular client. Before examiners show up, RIAs should test their ability to find various types of emails.

The SEC’s email request may go well beyond communications involving a particular client, and the examination team might ask for emails related to a particular situation or type of investment. If an exam was prompted by a tip or complaint, it is very likely that examiners will ask for any and all emails related to the incident. Email correspondence will also be extremely useful to examiners who are investigating allegations of insider trading.

Too many RIAs do not treat emails with the same care and respect as other forms of written communication. With a few misplaced words, a short email might become false or misleading. As Mark Twain said, the difference between the right word and the almost right word is the difference between lightning and a lightning bug.

There is a place for text messages and emails in client communication—assuming they are carefully constructed and retained in accordance with the Books and Records Rule. An RIA must also construct comprehensive policies and procedures making certain that client communications are not misleading. Furthermore, policies and procedures should set forth the parameters for client communication used by the firm and associated persons.

RIA compliance personnel should also use due diligence to investigate whether client communications are thorough, complete, and not misleading. They should monitor client communication, ensuring that associated persons are not making guarantees or using language that promises too much.

RIAs must also exercise great care if they are delivering updated brochures and brochure supplements, as well as other important documents, via email. Before sending them, clients must sign an electronic delivery consent form or should agree to the use of email in their advisory agreement. The mere fact that clients give an RIA their email address should not be construed as consent to delivery of important documents. RIAs should retain evidence that the intended recipient actually received the delivery, such as a return receipt or documentation that the information was accessed, downloaded, or printed. Otherwise, an examiner might fear that an important communication ended up in a client’s junk mail folder. Like most books and records, communications must be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the fiscal year during which the last entry was made.

The Big Picture

Advisors may be under the illusion that they are communicating effectively with clients. A major concern with emails, instant messages, and text messages is that senders do not treat them with the same respect as traditional forms of communication. Electronic communications are frequently sent without considering the RIA’s compliance requirements and fiduciary obligations. Furthermore, because emails tend to be informal, there may be extraneous information in them that reflects badly on the firm.

A hurried or overly-brief response may cause the communication to be false or misleading. Instant messages and text messages may be even shorter and more rushed. In addition, communication may be taken out of context by an examiner reading it.

Text messages and email may prove to be a helpful addition to traditional client communication using meetings, phone calls, newsletters, reports, updates, and educational conferences. Without that dialogue on an ongoing basis, electronic communications won’t do much to enhance the client relationship.

Depending on the content of the email, disclosures may be necessary to ensure that it is not false or misleading. Using the limited space on an email for marketing purposes leaves less room for meaningful disclosures that are necessary for compliance purposes. For instance, many firms warn clients on every email that electronic communications should not be used in situations where immediate attention is required, since the recipient may not act upon the request in a timely manner.

Les Abromovitz

Les Abromovitz

Les Abromovitz is the author of The Investment Advisor’s Compliance Guide, published for 2012 by The National Underwriter Company/Summit Business Media. Les Abromovitz is an attorney and member of the Pennsylvania bar. Les has handled hundreds of consulting and publishing project for a leading compliance and regulatory services firm. He has conducted a number of seminars and training sessions dealing with compliance subjects. Les is also the author of several White Papers that analyze compliance issues impacting Registered Investment Advisors (RIAs).