About one-third of the financial advisers who we see exit their broker-dealers, either of their own accord or as a result of being terminated, leave because of a conflict or miscommunication with their compliance department.
Although many advisers try to stay off their compliance department's radar, it is actually critical for advisers to be in regular contact with that department. The role of the broker-dealer compliance department is to protect the firm and its advisers, and the adviser-compliance alliance is one of the most important professional relationships advisers may have throughout their career.
Advisers who don't have solid relationships with their compliance department, in which both sides are candid and cooperative, should be concerned.
Consider two scenarios in which adviser-compliance communication may go awry:
Making assumptions. In our experience, advisers who make assumptions about permissible business activities sometimes find themselves in violation of compliance rules. In one common example, we have worked with advisers who have assumed that particular products that didn't fall under the category of “securities” were exempt from requiring compliance department approval.
Yet these assumptions resulted in
Financial Industry Regulatory Authority Inc. regulation violations and, ultimately, termination.
Selling away. In another example, an adviser brought his clients to a seminar for a product still under due-diligence review with his broker-dealer, assuming that if he were to forgo taking commission on any potential sale until the product's approval, he would not be in violation of any rules or regulations. Despite his not taking any form of compensation on the eventual sale, when his compliance department learned of his participation in the transaction, he was immediately terminated for cause for selling away.
Adding insult to injury, Finra and state regulators investigated and then suspended the adviser from doing business.
In these cases, terminations could have been avoided had the advisers been open with their compliance department and asked what was permissible before embarking on any questionable activity.
Lack of clarity. Although it is important for advisers to be proactive with their compliance department, effective communication needs to be a two-way street. It is important for rules to be clearly spelled out so there are no misunderstandings.
Consider the case of the dually registered adviser who held seminars for the advisory side of his business. Although he had the seminars reviewed and approved prior to their start, a couple of years later, a compliance audit showed that he hadn't resubmitted the seminars for approval since, and the adviser was terminated.
Had the compliance department indicated in its initial approval that the adviser would need to resubmit each year he held the seminars, even if the product materials and presentation were the same, the situation might have been avoided.
Unfortunately, careers can be severely disrupted — and in extreme cases, ruined — as a result of a lack of communication and collaboration between advisers and compliance departments. Termination can have far-reaching consequences, and finding a new broker-dealer can be a difficult and lengthy process for those with marks on their Central Registration Depository records.
MARKS ON RECORDS
Many aren't aware of just how serious and long-lasting the damages of having marks on their record can be. (See “How to protect your CRD,”
InvestmentNews, Nov. 4).
Typically, when advisers explore a new firm, their focus is on finding the right technology platform and level of marketing support, when it is just as important to find a compatible compliance department. Advisers who are considering a move need to ask prospective broker-dealer compliance departments a host of questions.
For example, how will they work with the book of business and product mix?
Ask questions to determine how “user-friendly” the compliance culture is and whether the team tries to find creative ways to say yes — or is more likely to automatically say no to requests. Advisers need to protect themselves by carefully selecting a broker-dealer with a compliance department with which they can form a long-lasting, collaborative relationship.
Jodie Papike is the executive vice president of Cross-Search, a third-party, independent-broker-dealer adviser and executive placement firm.
