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Regulation and Compliance > State Regulation

Playing by the rules

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To play by the rules, you have to know the rules. For many advisors, that means becoming familiar with such imposing documents as the FINRA Manual, a sprawling and still-growing amalgamation of legalese (posted online at that at last count included close to 1,400 pages of rules from FINRA, the NASD and the NYSE. And that’s excluding hundreds of additional pages containing recently approved rule changes and decades worth of regulatory notices. A light beach read it is not.

So while tighter regulation of financial and insurance markets may be a blessing for consumers, it also means advisors who do business in those markets must dedicate more time, energy and resources to regulatory compliance. It’s not a responsibility that advisors necessarily savor. Indeed, among all the facets of an advisor’s job description, compliance might just be one of the most thankless. Why fault an advisor who invests so much in compliance efforts for sometimes wondering, “What’s in it for me? Can I turn my strong compliance record and high standards of market conduct into a positive force to build my business?”

“It’s an interesting question,” says Jim O’Shaughnessy, a managing partner at Sheridan Road Financial Services, an advisory firm in Northbrook, Ill., that serves corporate and individual clients. “Up to this point we haven’t seen a lot of firms and advisors directly promoting themselves based on a good compliance record. But given what’s happened with some financial services firms of late, and people generally being more skeptical because of that, I would be surprised if there’s not more emphasis put on [compliance record]. I really do think people are going to do a lot more research and ask a lot more questions before they place their business with someone.”

From a marketing perspective, having a spotless compliance record might not be a difference-maker worth trumpeting in a brochure or advertisement, but it can provide additional traction with clients and prospects in a range of more subtle and indirect ways, advisors say. “I think as a marketing tool, [the compliance record] doesn’t make that much of difference, unless it’s a competitive situation, when a client is evaluating two or three advisors. That’s a situation where I would bring up the fact that I have a clean record,” explains Jeff Leib, CFP, CLU, CSA, RFC, principal at ICON Insurance in Woodland Hills, Calif.

Besides keeping you in business, out of regulatory hot water, in clients’ good graces and away from negative publicity, having a strong compliance record does pay dividends. Here are a few of the bottom-line benefits to staying clean:

It helps earn references and referrals. For a firm like Sheridan Road that relies heavily on referrals from clients and other professionals–attorneys, CPAs, etc.–a strong compliance record is crucial, explains O’Shaughnessy. “Almost all the business we take on comes through favorable references and referrals. We wouldn’t have those opportunities if we had a spotty compliance record. People provide us with good referrals because they trust that we always place the client first and we are doing everything ethically.”

“Compliance problems can really hurt an advisor’s reputation,” adds Cliff Oberlin, president of NRP Financial, an independent broker-dealer in Bryan, Ohio. “And if you don’t have a good reputation, you are in trouble.”

It makes a major difference when targeting corporate/group clients. If your firm offers advisory services to corporations and other groups, chances are compliance history will come into play, says Oberlin. “If you’re going to be doing business in a corporate environment, you’re probably going to be questioned about your record. A publicly traded company recently invited me in for an interview as a potential financial planning consultant, and in the RFP I had to discuss my [compliance] record and my firm’s record. It was part of the due diligence process. In this case the HR people were very attentive to compliance record. If you’re doing an RFP as part of a competitive process, it’s good to be clean. It’s going to put you at a disadvantage if you have any problems on your record.”

It tells clients you pay attention to their needs–and to detail. “When we meet with clients and prospects,” says O’Shaughnessy, “we always put a lot of emphasis on explaining and documenting things in detail. I think that tells clients that you put their interests first and that you are detail-oriented.”

When changing firms or applying for a new license, having a clean compliance record helps. Having a clean record matters not only to advisory practices and broker-dealers when they are choosing the advisors with whom to align, it also weighs heavily in advisors’ efforts to secure a new license from regulators. A blemished record “could cause complications if you want to move your license to another state, for example,” says Oberlin.

It can help you earn honors and appointments. A sparkling compliance record might not be marketable in and of itself, but having one can lead to awards, honors and other professional distinctions that an advisor then can use as a marketing differentiator.

Having a squeaky clean record is usually a prerequisite to earning any sort of business-related honor or distinction, Oberlin points out. “With awards, compliance record is one of the filters they use. Also, if you want to serve on an industry committee or business council, for example, they are going to check out your record.” A stellar market conduct record gives clients peace of mind. A strong compliance history functions much like a client testimonial, according to Leib. For that reason, he often suggests point-blank that clients and prospects go on-line to and relevant state agencies in California to check out his record. “I tell people to go and take a look,” he explains, “but not as a competitive thing. My motivation is for them to see that I am the person I say I am, and my record speaks for itself. That record is part of the commercial that tells people about me.” As far as O’Shaughnessy is concerned, the more informed people are about the advisors who are vying for their business, the better. “I think more disclosure and more awareness are ultimately good for everyone,” he says. Everyone, that is, except the bad apples.


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