As a recruiting firm, we deal with compliance issues so frequently that, put in college terms, I majored in recruiting and minored in compliance. The last two years have seen regulators tightening the thumbscrews on broker-dealers and, in turn, advisors. There is little room for error in our industry today—what once might have caused a change of broker-dealer can now put you out of business. Couple this more stringent compliance environment with securities attorneys increasingly expanding their profit centers into our industry and you’re left feeling a bit paranoid.
If you ever find yourself needing to go to arbitration, realize only about 12% of advisors end up winning. If the client is a senior, you can cut the 12% in half. For advisors with multiple compliance marks, it’s become increasingly difficult to find a new home or to even stay at their current broker-dealers as firms try to look good to regulators by shedding themselves of problematic reps. When trying to find a new firm, multiple-mark compliance histories oftentimes require “special supervision” for six months to a year. The problem with special supervision is the added compliance administration that is required; few firms are willing to even consider special supervision unless the advisor has enough production to make the added burden worth the effort.
We’ve put together a list of 10 ways advisors can keep their practice out of jeopardy by building somewhat of a Kevlar protective coating against customer complaints, conflicts with their broker-dealers and securities attorneys looking for mass mediation opportunities.
1. Have a financial plan in place to back up your investment advice. Any client can file a complaint against you, but does the complaint have any merit? If you have a financial plan backing your investment decision, it makes it extremely difficult for the opposing side to win, with these cases often being dismissed.
2. Switch to lower up-front commissions and larger trails on variable annuities. Securities attorneys relish going after variable annuity cases when the rep took a 6% up-front commission with a 25 bsp trail. Why? Because they usually win. Arbitration panels have a strong bias against large up-front commissions, so if you ratchet down to a 3% commission with a 50 bsp trail or 1% commission with a 1% trail, securities attorneys will be much less interested in your case.
3. Align yourself with a broker-dealer that will stand behind you when a customer complaint arises. Broker-dealer responses can vary greatly when it comes to how they treat advisors when customer complaints arise. The ideal firm will stand behind you and fight for you through the process, assuming nothing heinous was done on your part. What you want to avoid are broker-dealers that follow the French mode of law, “Guilty until proven innocent.” Some firms do not even ask your opinion on a case—they assume your guilt and give you 30 days notice along with harsh language piled on your compliance record. For the sake of your business, you want to avoid broker-dealers that are fair-weather friends.
When doing due diligence on a broker-dealer, you might consider talking to securities attorneys for their perspective on a particular broker-dealer. You can also talk to third-party recruiters such as our firm, since we have an objective perspective as to which firms are hostile and which firms are supportive.
4. Do complete asset allocation. One advisor we consulted with recently hired an attorney to do a mass mediation of five clients over improper asset allocation of 401(k) rollovers into variable annuities. The advisor told me that the funds had been allocated in growth, and growth and income sub-accounts, but no bond sub-account. This was because at that time we were in a rising interest rate environment, which would have resulted in losses for bond sub-accounts. At arbitration, the broker-dealer caved in on every complaint due to the lack of bond sub-accounts in the allocation. The advisor was given 30 days notice to find a new firm and five new marks on his compliance record.