More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
An interesting question came up recently on Securities America's internal advisor discussion board:
I would be interested in hearing what policies or procedures other advisors use when an employee makes a mistake that costs the advisor money. I am specifically speaking about a situation when the employee did not follow documented procedures. Do you give the employee a certain amount of leeway, after which the cost of the mistake comes out of their paycheck? Or do you treat this as a cost of doing business and not charge the employee anything? I am looking for ideas as I’d like to address this situation in my employee handbook.
Before we look at best practices for handling employee mistakes, let’s get one idea out of the way. As justified as it might seem to dock an employee’s pay to recoup the money lost due to the mistake and as a preventative/warning measure to underscore the seriousness of the offense, this is not a viable option. First, it’s fraught with legal risks. Second, it’s the equivalent to swatting your dog on the nose with a newspaper for having an accident. You get the behavior you want out of fear—which in humans isn’t motivating and could actually backfire on you the next time the employee feels your behavior justifies taking a few office supplies or worse.
Rather than focusing on who pays for the mistake, advisors should focus on the possible causes of the mistake and then identify the best way to prevent it from happening again. Most job mistakes are caused by faulty processes, not people. Ask yourself if the mistake resulted from:
- Lack of training: Have you set the employee up for success by providing timely and thorough training in tasks? Does the employee (or the whole staff) need a refresher training?
- Lack of documented procedures: Has the procedure been handed down from employee to employee verbally or has it been written down? When was it last updated?
- Lack of focus: Are the factors in the employee’s work environment or personal life that may be distracting?
- Lack of clear expectations: Were your instructions specific enough for the employee to deliver what you had in mind? Did you set up the employee to succeed – or fail?
- Lack of ability: Is the employee capable of doing the task assigned?
- Lack of motivation to do the job right: Does the employee want to perform this task and do it well?
If you’re thinking you can’t control the last two possibilities on that list, you’re wrong. I’ve had a few conversations with advisors about the importance of “knowing your players.”
I don’t know which basketball coach to whom I should attribute this story, but it goes like this. A coach approaches his star player after a horrible game and an overall recent decline in that player’s performance. The coach yells, “I can’t decide what’s wrong with you. Is it ignorance or apathy?”
The player responds: “I don’t know, and I don’t care.”
If your players know, and your players care, then the Corrective Action Procedures listed below are effective in addressing and ceasing
costly mistakes, or effectively ceasing employment for players that just aren’t effective.
- Verbal Counseling: The advisor meets with the employee to explain the current job performance issues, how they negatively impact job performance and future job performance expectations. Advisors should document the discussion, including the agreed-upon steps to correct employee performance.
- Written Corrective Action: The advisor documents the job performance issue on a Written Corrective Action form. As in the verbal warning, the corrective action form describes the job performance issues, how they negatively impact job performance and what must be done to correct the situation. The written corrective action takes the additional step of outlining any consequences (i.e. terms of probation, reduction or loss of bonus, etc.) if the performance issues continue.
- Final Written Corrective Action: If the problem/issue is not resolved after the written corrective action, or if progress is not maintained, a final corrective action or employment termination may be initiated.
- Employment Termination: Some employee behaviors, such as insubordination, theft, inappropriate actions or gross misconduct, may result in immediate dismissal without the issuance of a verbal or written corrective action.
Mistakes are an important part of the employee learning process, but they definitely represent risk to a financial services practice. How you train and manage your employees, including how you handle their mistakes, improves the return on your human capital investment in them and reduces the risk they will make mistakes. With the new year around the corner, take time now to review areas like training and written procedure updates to help you and your staff have a successful and error-free 2013.