Compliance boon: An adviser’s reality

It can be a nuisance. It can be time-consuming. It can be frustrating. Yes, your compliance department can be all of those things, but it can also save you a lot of trouble. Many investment advisers don’t appreciate the value of compliance, but I do. In fact, I consider compliance my friend.

Of course, every compliance department adds a few hoops to jump through, but those hoops are necessary. The rules were put in place by the Financial Industry Regulatory Authority Inc., and the compliance department is simply enforcing them. In fact, in my book, “Principle Matters: 11 Strategies for Harnessing Your Passion and Becoming an Authentic Financial Advisor” (Linx Corp., 2012), I devote an entire chapter to the reasons I not only appreciate my compliance department but rely on it.

Recently, one of my high-net-worth clients requested a one-page summary of his investments, as well as information on his cash flow. Compliance shot it down because Finra rules regarding consolidated statements are complex and fraught with danger. To protect clients (and yourself), it is better for clients to consult their own investment statements to piece together what they want to know.

FACE TIME

This might seem like compliance is only making things more complicated for the client and the advisers. But the truth is that compliance is looking out for everyone’s best interests. In lieu of offering a one-page summary, I decided to meet with my client and go over his statements in person. Not only was I able to answer all his questions and provide the analysis he wanted, but it was a great opportunity to have some face time. Firms spend a lot of money to ensure that client statements are accurate and properly disclosed, and using these statements saves you time, as well.

Compliance departments don’t just regulate reporting. Their advice and instruction when dealing with difficult clients can keep you out of major difficulty. In the late 1990s, a client of mine fell victim to the lure of the dot-com bubble. In the beginning of our relationship, he and I discussed his objectives and risk tolerance, and decided that moderate growth and income was our goal. But it was the 1990s, and tech was booming. My client wanted to invest aggressively in the sector. I knew, based on his initial risk assessment, that a risky tech stock was not the right way to go. In spite of my discouraging him, my client insisted on investing. So I asked my compliance department what I should do. I was told that the ticket must be marked “unsolicited,” and it would be beneficial to get something in writing from the client confirming that this stock idea was solely his own and that he understood the risks.

SURVIVAL INSTINCT

My client submitted unsolicited orders for tech stocks several times that year, and each time, I got the documentation from him. Although I was uncomfortable with the trades, I knew that I was pretty well-covered, thanks to the advice I had received from compliance.

Unfortunately, my instincts on this were correct. Within nine months, all my client’s aggressive stocks caved, and he promptly sued me. Although arbitration is often an uncertain process, I knew that I had not done anything wrong, because I had sought out my compliance department’s help — and followed it. Because I embraced compliance, I did not have to pay this former client a penny.

There is a reason that compliance requires you to document everything: Money brings out a lot of emotions, and when there are emotions involved, it is always a good idea to have that documentation there to reinforce the truth.

When you run your business in an ethical and honest manner, you have no reason to fear or dislike compliance. Consider the minor inconveniences presented by this department and then think of potential repercussions. I think we’d all rather deal with the small annoyance of paperwork and documentation than with a potentially career-ending lawsuit.

Ultimately, compliance is in place to help both the client and the financial adviser. It is up to you whether you allow it to drag you down or let it elevate your business.

Robert J. Collins is managing director of investments at the Collins Investment Group, a wealth management firm.

Related Topics: Practice Management