As an advisor, you relentlessly perform risk assessments for your clients’ portfolios. Yet, one aspect of risk assessment you may ignore is the downside of being an advisor with a clean compliance record who is tied to a broker dealer with problematic compliance and financials.
Compliance issues at the broker-dealer level are an area of concern rarely explored by advisors, but they should be. Is your broker-dealer home to a high number of advisors with numerous compliance or credit disclosures?
As the Financial Industry Regulatory Authority drills down on anything and everything, a broker-dealer in poor standing with FINRA can make life more difficult for all its advisors — even if you may have a spotless record. It’s an issue of guilt by association.
To explore this issue, we went to securities attorney Jim Eccleston of Eccleston Law.
We asked, “If you are an advisor with a clean compliance record, but you are at a broker-dealer that has a high percentage of advisors with multiple marks on their compliance records, what impact directly and indirectly does that have on an advisor with clean compliance?”
Jim shared the following perspectives:
First, a firm in poor standing with FINRA will need to endure additional regulatory sweeps and audits. Depending upon the subject matter, these may or may not involve the clean advisor.
Second, in defending those regulatory audits, the firm will expend additional time and financial resources, which ultimately will be passed on to all advisors.
Third, if the firm needs to sacrifice a few lambs to please the regulators, morale will be affected and possible management turnover will affect the stability and predictability of the firm’s operations.
How to Check Your BDs’ Record
One way to get a feel for your broker dealer’s advisor quality is to view its advisors’ compliance record on FINRA’s BrokerCheck. Here’s how to do it:
- Go to: https://brokercheck.Finra.org/
- Click on the “Individual” tab (so it is highlighted blue)
- Click on “Firm Name or CDR #” and type in your broker dealer’s name then hit enter (Type in State under “City/State/ZIP” box to view advisors in specific state)
- The name of the advisors at your broker dealer will come up and you can then click on the names of the advisors that have “Yes” under disclosures
- You can scan page by page just to view number of “Yes” advisors or you can look at them individually to see the compliance details of each advisor
What constitutes a problematic advisor differs quite a bit.
For FINRA, most anyone with anything on his or her record is viewed as problematic. However, there also are advisors with multiple serious disclosures showing a pattern of client abuse, and yet some broker-dealers seem to have no issue with such registered reps— if these advisors have high enough production numbers.
As a recruiting firm, these are the criteria we use as a guideline to discern what constitutes problematic:
- Any disclosures that show serious negligence or financial abuse toward clients such as churning, borrowing money from a client, forging a client signature or selling away with products not approved by broker dealer such as a viatical contract
- Multiple marks where fines were paid, reflecting a pattern of guilt but not including disclosures over market loss
- Multiple disclosures regarding credit issues over the last five years (credit issues caused by divorce or medical hardship not as serious)
- Disclosures showing multiple terminations from prior broker dealers, or “permitted to resign” situations
One Measure: The Industry Average
FINRA requires broker-dealers to keep track of the compliance and history of their advisors through a Registered Representative Composition Report.
The intent of these reports is to make the broker-dealer aware if they are above the industry average in any of the 10 categories that broker-dealers are required to track.
Here are the categories:
- Representatives new to the industry
- Transferred from another firm
- Registered with three or more firms in the last two years
- One or more disclosures
- Customer complaint disclosures
- Criminal disclosures
- Financial disclosures
- Previously with a severely disciplined firm
- Arbitration/civil litigation disclosures
When FINRA audits broker-dealers, they will examine the Registered Composition Report to see if the firm is above the industry average in any of the 10 categories.