More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
As I write this column, I have just returned from the opening night dinner at the Barron’s Top Independent Advisors Summit in Orlando. I was privileged to be a keynote speaker during the conference. Looking around the room after speaking to attendees, including many clients and principals from all of the major custodians, there was one trait that advisory firm attendees appeared to have in common: the desire to share their experiences, both the good and the bad, with other industry leaders. This sharing serves to confirm that although a diverse community, most advisors have had common experiences. These experiences are not isolated to this year’s “industry leaders.” Rather, having had the privilege to work with advisors for more than 25 years, I have come to learn that these experiences are consistently applicable to all advisory firms who were this year’s leaders, last year’s leaders, next year’s prospective leaders, and all other firms that aspire to be a recognized leader in the future, no matter how or by whom they are recognized.
Most advisors started with a few clients. Most never thought they would be managing a business, just other people’s money. Most advisors have never had any formal business training, and most have been successful despite not being very good business men or women.
Most advisors realize that no one manager is right all the time—not even close—and that being honest is just as important as being right. You can always be honest, but you can never always be right.
Furthermore, no matter what the Kool-Aid sellers will tell you, no questionnaire can fully measure an investor’s true risk tolerance. No investor truly knows his or her emotional tolerance for market volatility or ability to withstand losses until his or her portfolio suffers a material decline.
It’s easy to take a bow when markets are performing well, but it is a wise advisor who doesn’t forget how important regular communication is during a down market. Experienced advisors know that their job is to identify risk tolerance and investment objectives and to allocate client assets consistent with those parameters (and when markets underperform, to provide the needed discipline so that investors don’t make the much-too-often-repeated mistake of buying high and selling low).
For those few clients who will never get it, let them go. For most advisors, the best client-related decision is to know when to say no: You and the client are not a good fit, and if they weren’t happy with their last advisor (whom you know is pretty good), you are destined to be the next casualty.
When it does hit the fan, and it has at some point for all advisors, and that little voice in your head says, “I knew this would not end well,” that voice should hopefully only need to be heard once, because you have developed the discipline and confidence to walk away rather than continue a relationship that will consume a disproportionate amount of your time and energy.
Finally, the much-too-often-repeated and potentially most dangerous mistake for advisory firm leaders in the post-Madoff era is to take for granted that compliance is being adequately discharged in their firms without taking an active supervisory interest. At the end of the day, it is your firm, and the buck stops at your desk. Get involved and stay involved. Delegate does not mean abdicate. Because you are required to appoint a chief compliance officer does not mean that you, as the chief executive officer, can or should rely solely on that person. Although the CCO reports to the CEO, it is the CEO who needs to confirm that he or she has the right person for that role. As a great president once said: trust, but verify.