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Regulation and Compliance > Federal Regulation > FINRA

Know Your Client

By Bill Miller

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One of the great joys of being a financial advisor is the opportunity it provides to develop a close relationship with your broker-dealer’s compliance department. This most often happens during an office audit. Who among us doesn’t relish the chance to explain every single detail of every single transaction we’ve made throughout the year?

One of the things your friendly auditor is looking for is documentation that you actually know your client (FINRA Rule 2310). The auditor assumes that if you know your client, there’s no way that person could be a terrorist. This leads us to the question, “Would you turn away a huge commission simply because your client knows how to make a pipe bomb out of a Twinkie and some dental floss?” Answer this in your own head . . . I really don’t want to know.

For the vast majority of you, you really want to follow the rules. I’ve always wondered if there might be something advisors could do to prove to the regulators that they really do know their clientele. The answer suddenly dawned on me while I was hosting a sleepover to celebrate my son’s ninth birthday.

Here’s how it might work. Invite five to 10 of your best clients over to your house for a sleepover/slumber party. Have them arrive early enough so you can order way too many pizzas and partially consume two cases of mini-Cokes. It’s also a good idea to offer bowls full of M&Ms and other high-sugar candies to make sure all your guests are appropriately wired.

At 8:00 p.m., make all your guests put on their pajamas and spread out their sleeping bags on the floor in front of the TV. Put on a boring G-rated movie for all to enjoy. If you choose to leave the room, you can probably expect to see your movie replaced with “The Family Guy,” “The Simpsons” or some light porn.

Ping-pong, foosball, and pillow fights should make up most of the rest of the evening. These activities are designed to kill time until the real fun begins — when some of your guests start to fall asleep. This is where you find out which of your valuable clients has a little devil in him or her.

Don’t be surprised if the town attorney suggests something like shaving your CPA’s eyebrows while he sleeps. He might also whip out a variety of Sharpie permanent markers and do a little face painting on the rest of the sleepers. Be sure to take detailed notes of who does what so you can put all this information into their respective client files.

Be on the lookout for the most devious client. There’s one in every crowd. It could be a physician or, more likely, one of your clergy clients. You’ll know exactly which one it is because he or she will be the one to suggest dipping a sleeper’s hand in a bucket of warm water. Preferably, the chosen one will be sleeping on a hardwood floor and not your plush shag carpeting.

Eventually, everyone will pass out. When you see them in the morning, don’t be surprised if the scene resembles the morning after a frat party. Expect bodies strewn everywhere, with crushed cheese doodles and pretzels neatly ground into your floor. Again, take detailed notes.

Now, when your auditor finally shows up and starts asking you questions, you’ll have some real ammo. When your auditor asks how well you know a particular client, imagine his or her face when you say, “He sleeps in Scooby Doo PJs and can expel intestinal gas when you pull his finger. He has also been known to shave his friend’s eyebrows. I also know that he drinks too much soda before bed, and you definitely don’t want to sleep downstream from him. As you can see, I take FINRA Conduct Rule 2310 very seriously.”

The rest of your audit should be a piece of cake.

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Once a mildly amusing comedian and a recruiter for a top independent broker-dealer, Bill Miller now works as an industry wholesaler; reach him at [email protected]

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