According to John P. Huggard, CFP, CLU, too often, advisors take their eye off the ball in regards to compliance issues.
Not that they’re necessarily doing the wrong thing with malicious intent, but that they don’t know all of the available compliance issues.
As Huggard sees it, advisors do a a good job of building their business and increasing their income. However, not keeping up with niggling compliance issues can cripple a financial practice.
With that in mind, Huggard has identified the compliance issues that federal regulators are most concerned with for 2014.
One of the major issues facing financial advisors today is selling financial products to older clients who may have reduced mental capacity that is not recognizable. Almost every advisor is aware of the Glenn Neasham case in which Mr. Neasham, a financial advisor, sold a variable annuity to an older client.
The variable annuity was a suitable financial product for this person and, indeed, actually increased in value. A family member complained that the variable annuity should not have been sold to the client because the client had reduced mental capacity. Over the course of a few years, Mr. Neasham essentially lost everything he owned and was eventually convicted of larceny involving the transaction. His conviction went to the appellate courts in California and recently was reversed.
However, it is important to understand that financial advisors must still be vigilant when dealing with older clients or any client that might have reduced mental capacity.
The best way to handle the issue of reduced mental capacity with older clients is to determine whether or not they have been involved in other transactions that would require mental capacity. 2. Failure to Supervise
Some financial advisors are placed in supervisory positions (OSJ, office supervisor). One of the major issues in nearly every FINRA case filed today against a registered representative is the issue of whether or not the employing broker-dealer, through its supervisors, properly supervised the financial advisor.
If it can be shown that proper supervision did not occur, it will expose the brokerdealer and its supervisors to a potential adverse judgment before a FINRA panel. One of the easiest ways to ensure that financial advisors are not involved in activities that will result in regulatory complaints is to contact clients on a regular basis (not less than twice a year) and ask those clients if their financial advisor has been involved in any prohibited activities.
Such a request can easily be sent out by mail or email or be enclosed in statements sent to the clients. In most cases, the clients will indicate that none of the activities listed have taken place and they need not respond.
However, should a client discover that her or his financial advisor is involved in any of the activities listed, it will enable the broker-dealer to immediately look into the matter. Such a form will also provide the broker-dealer with the ability to show that it is attempting to supervise the individuals it hires. 3. Outside Business Activity
Anything that generates income or remuneration, however small, is considered an outside business activity. Problem areas include:
Honorariums. For example, a financial advisor who agrees to give a short talk to a civic group without compensation can be held to have been involved in an outside business activity if an honorarium is later provided.