Alcatraz Island is a tourist destination in San Francisco Bay. My wife and I lived in San Francisco two years when I was a regional sales manager. People asked if we ever visited the famous prison.
I told them, "I cannot see any reason who someone in the financial services business would ever voluntarily walk into a federal penitentiary!" It was a joke, but it highlighted the serious consequences of mishandling other people's money.
Regular readers of ThinkAdvisor see the stories about the consequences of "advisors behaving badly." They are often found guilty in court, slapped with a large fine and sent to prison. Affected clients may or may not be made whole again.
You can still get in trouble even if your intentions are good. It is tempting to take shortcuts, to do special favors, or to otherwise bend the rules in ways you think won't be harmful to clients.
But you are a licensed professional. There are rules in place to protect you and your firm, and you could be suspended, fined or worse for breaking them.
No one wants this to happen to them. What should you do ... or rather, not do? You learned hundreds of rules before you entered the business. Here are some that advisors might be tempted to break:
1. Do not trade in client accounts without permission.
Discretionary accounts exist. They require lots of paperwork signed by the client. You might have clients who say "Do whatever you want." You still need to talk with them, get their permission, do the trade and confirm the trade afterward.
Risk: The client tells your firm: "I never authorized any of these trades."
2. Do not trade in client accounts after they have died.
You have a client. They follow your advice all the time. When you call, they say "Do it." They have recently passed away. You continue to trade — and one or more trades don't pan out the way you expected. The estate attorney notices. The firm is notified.
Risk: "The client could not have placed these trades. They were dead."
3. Do not recommend stocks not followed by your firm's research.
Clients might trust your judgment, but they are also buying the expertise of your firm's research department.
Risk: The client contends "I bought this stock through my advisor, an agent of your firm."
4. Do not forge your client's signature on documents.
This might seem to expedite the process, especially if it suddenly becomes apparent the spouse's signature is needed. Even if your client says "Go ahead and sign," it's still against the rules. The same goes for impersonating your client on the phone.
Risk: The forged document will live in cyberspace forever. If there is ever a problem, the client can say: "That is not my signature. I never signed that document."
5. Do not sell products "on approval."
If you work in the business long enough, you see almost everything. There was an advisor who would take a new product (a stock, mutual fund, closed-end fund or something similar) and tell the client: "Let's buy it now. If you decide you don't like it after it starts trading, I will take it back, no problem."
Risk: The client cannot own it if it rises and hand it back if it declines in value.
6. Do not create your own performance reporting statements.
This might seem like a practical step if the firm's reporting system is complex. You feel you are putting the numbers in a simple format. You create the document and give it to the client. This is not an official firm document. It does not have all the disclaimers. You read about fraudsters who create phony statements to buy time after they have stolen the client's money.
Risk: The firm's account statements and trade confirmations are the only legal documents. Yours do not count.
7. Do not let clients trade in another's account without a power of attorney.
This might happen with spousal IRA accounts. One person says: "Buy it in my partner's account too." A POA must be on file.
Risk: Suppose there is a divorce in the future. The spouse can say: "I never authorized those trades." They want them undone.
8. Assume conversations are recorded.
Your firm might have a voice alerting people "This conversation might be recorded for training purposes." You are used to that. Your client might be recording the call too — in most states, they can legally do so without your knowledge or consent.
Risk: Things you say casually might one day become evidence in court.
9. Do not borrow money from a client's account.
Obviously, it is illegal to do this without the client's consent. Even with their approval, you are at risk of running afoul of the Financial Industry Regulatory Authority and your firm.
Risk: Aside from the regulatory risk, it can put your personal relationship at risk if you can't pay them back.
10. Do not tell clients about outside investment opportunities.
You hear about a good real estate or private equity deal from "a friend of a friend." You get compensated for bringing in new clients. You tell a client. They invest. The investment goes south. They sue.
Risk: You are an agent of the firm from their point of view. If they bought on your recommendation, they assume your firm did their due diligence.
11. Do not accept a loan or a large gift from a client.
You and a client have become good friends. There might be large medical bills in your family. Your client offers to help. You must refuse. Perhaps another client gives you a gold Rolex as a Christmas present. Accepting is trouble.
Risk: FINRA's $100 limit on gifts — soon to be raised to $300 — applies to both giving and receiving. It speaks to kickbacks.
12. Do not trade on inside information.
This can come to you in a variety of ways. Your client might share it. They might be doing a totally different type of business. The CD buyer becomes an options trader.
Risk: This will become obvious when the authorities study trades made before the stock moved or the takeover was announced. You will be found out.
What Can You Do?
Don't assume you and the client are friends forever.
You decide to bend the rules or do something "a little illegal." You are helping out a client. You have become close friends.
Risk: When something goes wrong, investigators will lean on the people involved. The object is to get someone to flip and testify against the others. Your client is not going to prison for you.
Walk away from business that smells bad.
This is tough when you are under pressure to produce or the payout seems so high! After awhile you develop a sixth sense that something is off. When I was new in the business, my manager told us: "Do not do anything you would not want to read about on the front page of The New York Times."
Risk: You could become involved in a massive fraud.
Get help.
Small problems have a habit of becoming big problems. You do something wrong or make a mistake with a trade. You hold off, hoping things will move in your favor. You get the feeling a client is doing something illegal or not telling you the whole story. Walk right into your compliance manager's office and share your story. They have likely seen or heard about something similar.
Risk: If your small problem becomes a big problem, it becomes too late to fix it.
You work in a business where you can make a great living. You also work in a business where the presence of money brings the attraction of fraud.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, "Captivating the Wealthy Investor," is available on Amazon.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.