Tom Giachetti's 10 Blunt Compliance Warnings

Fifth, be specific on what you are offering your clients in the investing area. “Don’t use terms like ‘moderate’ or ‘aggressive’ in your investment policy statements” since, he said, doing so “could well come back to bite you in the ass.” Giachetti argued, “You don’t need a canned questionnaire” to assess a client’s risk tolerance. Instead, clearly define the client’s long-term and short-term goals, include a percentage of losses that the client can afford to lose and have the client sign that agreement.

Sixth, Dodd-Frank’s new requirements. Returning to his dictum that the “world has changed,” Giachetti listed several new requirements for advisors mandated by the Dodd-Frank Act: “You need a whistleblower policy, a pay-to-play policy and to be compliant with the revised custody rules.” In addition, he warned about the dangers of inflating the services that you offer cl

ients. “The scariest word on God’s green earth,” he said, is when he sees an advisory firm calling itself a “comprehensive planning firm.”

Seventh, don’t make these mistakes. Giachetti listed several steps that some firms take that might sound wise but are in fact very unwise. For instance, “don’t keep minutes of client meetings—they’re discoverable.” Moreover, the SEC has changed its exam question referring to client meeting minutes. Now, the question asks an advisor to offer the examiner “minutes to the extent that they are maintained,” so now they’re not required. Another move to avoid: having a low deductible on your E&O policy and failing to understand what your policy covers. To redress that, “read your policy and make sure it covers what you do in your practice,” then “raise your deductible and increase your coverage.” Covering a low deductible of $25,000 or $50,000 “won’t put you out of business,” but having a low amount of coverage—“low” being below $5 million—could easily do so.

Eighth, the DOL and FINRA for advisors. Giachetti reported several exam areas that at first glance might not seem appropriate for RIAs. For example, he said the Department of Labor is conducting ERISA exams of RIAs in New York and Los Angeles, and “they’re coming to Chicago.” Additionally, SEC examiners are now asking RIAs to explain how they supervise their branch offices, essentially “putting a FINRA question on an advisor exam.”

Ninth, your CCO. Giachetti had strong advice on the role of an RIA firm’s chief compliance officer. “CCOs better have authority in your firm” to ensure compliance well before an examiner comes to visit. CCOs with that authority, he said, “are the ones that will get you through an exam.”

(Giachetti explores the role of the CCO in more detail in his December 2012 Compliance Coach column for Investment Advisor.)

Tenth, since compliance is “all about getting you through” those exams, advisors should “take control of their businesses, making sure your CCOs have the resources they need.” He had special words of scorn for “consultants” who provide “one size fits none” compliance documents. Returning to his advice on reading your E&O policy, he suggested principals of RIA firms read all their documents to ensure that they accurately reflect the services and structure of the individual firm.

In his follow-up presentation, Friedman agreed that, “compliance is all about surviving audits.” Drawing on his experience of surviving five audits, he said advisors need to demonstrate a “culture of compliance” and that “you run a tight business.” Finally, he said that in preparing for an exam, make sure you use your technology, especially your CRM system, to quickly and more easily supply what examiners tell you they’re looking for, since “the CRM is where all this data lives,” including client lists, contact lists, important dates and account data. “Examiners don’t like to be buried in paper,” he said. “They prefer electronic.”