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Life Health > Running Your Business

SEC action is a red flag for advisors

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Financial professionals live in perilous times, especially those who advise clients about investments or who actually manage client money.

Related: Your AUM increase using social media: a cool $8 million-plus

Risks of cyber-attack, ransomware, identity theft, natural disasters, and even personal health crises are substantial.

Although most advisors know this, a recent SEI Advisor Network and FP Transitions white paper found that only 45 percent of financial professionals have a written business-continuity plan in place to assure their business stays open during a crisis.

Operating without a succession plan is even more dangerous when you consider the E&O insurance risks involved.

When a client with a pressing problem can’t reach his or her advisor, or an advisor can’t execute an important request, the person will rightfully assume the advisor dropped the ball. Complaints and lawsuits may soon follow.

For this reason, the National Ethics Association urges all financial professionals, not just investment advisors, to revisit their existing business-continuity plans — or create one if necessary. Since regulators have begun requiring this of licensees, now’s the perfect time to check this task off your to-do list.

One recent impetus to do so came from the Security Exchange Commission. The SEC recently proposed a new rule that would require RIAs to adopt and implement written business continuity and transition plans. The proposed rule is designed to ensure that investment advisors have plans in place to address operational and other risks related to a significant disruption in the advisor’s operations in order to minimize client and investor harm.

The proposed rule would require an advisor’s plan to be based upon the specific risks associated with the advisor’s operations. It would have to include policies and procedures addressing the following elements: 

    • Maintenance of systems and protection of data
    • Pre-arranged alternative physical locations
    • Communication plans
    • Review of third-party service providers

In the event the that an advisor is winding down or unable to continue rendering service, the plan would have to cover all of the elements needed to prepare for and minimize service disruptions.

The SEC rule would permit advisors to tailor the detail of their plans based upon the complexity of their firms and the unique risks they face.

What’s more, the proposed rule would require advisors to review the adequacy and effectiveness of their plans at least annually and to retain certain related records.

Fortunately, many FMOs, insurers, broker-dealers and regulatory-consulting firms have business-continuity plan templates available for their advisors.

The National Ethics Association and its E&O insurance affiliate, EOforLess, recommends advisors seek advice on this front and take quick action before an unforeseen catastrophe sparks an E&O insurance nightmare in their business.

This column has been reproduced from the September 2016 issue of Retirement Advisor magazine.


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