The due-diligence pro- cess for a broker-dealer change is a two-way street. Although financial advisers evaluate the offerings of a new broker-dealer, firms are also taking a hard look to make sure an adviser is a good fit for them.
For years, regulators have been ramping up the pressure they put on broker-dealers. Consequently, broker-dealers are scrutinizing advisers they bring on more than ever before.
The approval process for broker-dealers can be a subjective decision, and the impression an adviser makes on the broker-dealer starts with the first phone call. Advisers need to be ready to present key information about their practice, such as compliance history, gross dealer concessions, assets under management and product mix.
Just as critical is for advisers to communicate what is important to them and what they need and want from a broker-dealer. Broker-dealer recruiters will present features that may be enticing but not necessarily important for a practice.
A little preparation to help the broker-dealer understand the adviser's business and what the adviser needs in return will save both time.
STEPS TO TAKE
Following are steps advisers can take to make their practices as attractive as possible and to better the chances of being accepted to the best firm.
Be an open book. When talking to a new firm, leaving out details that may not seem significant or that an adviser thinks may not be discovered can cause problems. This includes details on past customer complaints, credit problems and issues with the current broker-dealer.
I recently worked with an adviser who left his broker-dealer during an internal investigation and failed to disclose this to his new firm. When his previous firm filed his U5 as “permitted to resign,” his new firm was caught off guard and thought the adviser misled them.
As a result, the firm terminated him for cause, even though the internal review closed without finding fault with the adviser. He came to us having to explain the termination to clients and needing to find a new firm.
The scenario could have been avoided had the investigation been discussed prior to the adviser's joining his new firm. Although it can be difficult to disclose sensitive issues, the best time for full disclosure is the courting process.
Settle credit issues. Since the financial crisis of 2008-09, firms are taking a closer look at advisers' credit histories. Advisers are often penalized for situations such as falling real estate markets that have resulted in credit issues or liens on outstanding debt.
Many firms will be understanding about credit issues if the adviser is upfront and has a payment plan in place for liens or debt that appear on his or her credit report.
Respond to customer complaints/Central Registration Depository issues. For advisers who have marks on their records, a little preparation before communicating with a new firm can make a difference. A “yes” answer to questions on the Uniform Registration forms filed on the Central Registration Depository covering topics ranging from regulatory violations to fraud and complaints — even those that have been settled, such as denied customer complaints, terminations and complaints that were settled to minimize time and expense — can haunt advisers years down the road. Many advisers are unaware that when complaints or marks appear on a CRD record, they have the opportunity to provide their side of the story.
Compliance departments need to be able explain their advisers' CRDs when regulators come knocking. It is up to advisers to help their new compliance departments understand gray areas on their record so the firm can justify bringing on the adviser — and do so upfront.
All advisers, regardless of their past, should be organized and prepared before starting the broker-dealer courting process. The adviser's first introduction call with a new firm should be considered a presentation of his or her business, in which he or she is ready to make a pitch.
How an adviser manages the business, brings in new clients and supports that business are all factors the broker-dealer will need to know upfront and the adviser will need to communicate. This will help ensure that advisers are accepted by the broker-dealer with the most to offer them.
Jodie Papike is the executive vice president of Cross-Search, a third-party independent-broker-dealer recruiting firm.