More On Legal & Compliancefrom The Advisor's Professional Library
- Whistleblowers A whistleblower is any individual providing the SEC with original information related to a possible violation of federal securities law. The Dodd-Frank Act established a whistleblower program that enables the SEC to reward individuals who voluntarily provide such information.
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
Last October was another milestone for us: we broke free of our broker-dealer. Champagne was in order as we created our own RIA and now work as fee-based advisors.
If you managed to look up my FINRA record, you will see we have been with a number of BDs over the last few years. In general, the experiences have been far from stellar.
Here is why we decided to create our own RIA.
1. Better Control of Client Experience
Some of the final straws for me were several experiences our clients had suffered at the hand of our last BD.
First problem case: We had forwarded a check to the home office, where staff member No. 1 dutifully logged it in. No. 1 had to transfer the check to home office staff member No. 2. Somehow it was lost between these two. Did I mention this was a check for our quarterly financial planning fees?
With many of our long-term clients, I could just call them and tell them what happened. They are pretty go-with-the-flow as a group and have worked with me long enough to believe me when I tell them that it was the BD who made the error, not us.
Unfortunately this was not a long-term client and it was a Nervous Nellie to boot. After assessing the situation, I felt I was better off just eating the lost fees, because I wasn't sure a new client would believe it was the BD who lost the check. Likely they would think I was covering my own derriere for a mistake made by my team. In the long run, I felt, I should pass on the fees and preserve the relationship. I would keep my mouth shut on what it cost us and not let the client know.
Unfortunately the BD wouldn't allow for that. They required me to call the client and tell her what had happened. They weren't even on the call to confirm I was telling the truth. As it turned out the client hadn't noticed the check wasn't cashed and yes, it did put some doubt in her mind about our competence. I am hopeful we will be able to keep this client—time will tell.
Second and third problems: Speaking of our quarterly financial planning fees, we had not one, but two, clients where the BD, through their RIA, billed them twice for our fees in the same quarter.
Fourth problem: A couple of years ago, after a lot of mishaps, I thought I had found the perfect BD. I had known them for years and done a lot of speeches at their annual meetings. I told them the only way I would leave was feet first.
Everything was hunky-dory for about 10 months, until they sold the firm to a much larger one to get out from under a financial crisis. This required us to repaper our clients for the new firm.
This wasn't a crisis and most of the clients were pretty understanding, although it was a headache on our end.
One year later the new BD changed its name, requiring another set of paper from our clients. This time, the clients were not nearly as understanding and complained a lot. It made many of them nervous and question the relationship with the BD and us and everyone's financial strength. We weathered the storm but it took more work to keep the clients happy.
This time when we had to repaper the clients, it was to my own firm—I knew it would be the last time.
It turns out my timing was perfect. About six weeks after we moved clients over to my own RIA, the last BD announced they had been purchased by a VC group—which would have necessitated yet another repapering. Crisis averted.
2. Providing Services a BD Prohibited
One piece of technology that we can now use is DocuSign. It allows us to send many documents to clients and get an electronic signature. They have a copy for their files and we get one, too. This saves us quite a bit on postage, not to mention a few trees and a lot of time in mailing documents back and forth.
This has been a big hit with clients.
We can also use credit cards for paying for our financial planning fees. It means we get paid sooner and the clients can use the loyalty points on their credit cards to get free trips or goodies on Amazon. This too has been a big hit.
3. Easier Compliance
Yes, this is a funny one, coming from me. I am the gal who used to say “I have never met a compliance regulation that I couldn't turn into a marketing advantage.” Well, I am not saying that any longer.
Because our last firm had over 1,000 reps, their compliance was more sweeping than that of a smaller firm. The large BD did not allow us to release marketing information about our educational events that said “Seating is limited to 16.” Or even “only four places left.”
Now, here is the crazy thing. Seating really is limited to 16. The room is too small to accommodate more. If I say there are only four places left, then we really only have four more seats. These are totally honest statements.
The larger BD was not allowed to have their reps use this type of language. When I complained to the chief compliance officer, she told me that one of their reps had been chastised by the SEC on this issue and the order applied to all the reps of the BD. As you can see, the larger the firm, the more onerous it is to comply with these one-off directives from regulators.
This may seem like a minor issue, but I have found success is in the details. So I am glad we can now honestly state how many seats we have left for our events. I am expecting a little better turnout, which turns into a few more clients coming on board every year.
4. Controlling Our Own Finances
Another major headache with our last BD was getting paid properly. Fortunately we kept very good records on the funds that were owed us. At one point, the BD owed us about $24,000 for cases they had no records of!
It took many frustrating meetings and a lot of time running through our spreadsheets to show them that they were holding on to a significant amount of our cash. Sure, they eventually admitted their mistake, and paid us, but it took a lot of man-hours on our part to get paid money we had already earned.
Another way we can control our own finances goes to the financial strength of the BD. We were actually affiliated with two different firms that went bankrupt. It came down to the same issue with both firms: They allowed some of their top reps to pressure the home office to approve some “alternative investments.” When the investments went bankrupt, the subsequent lawsuits from investors ended up bankrupting the BD. Unfortunately, one of these firms still owes me a lot of money.
I am not sure I will ever go back to BD World. But I do know, if I do, it will need to be a small, nimble firm that is financially secure, and doesn't approve any funky investments.
One of the best ways I can protect my financial future is to make sure all our partners are financially sound and treat their clients, the advisors, the same way we treat our clients.