In past years, we have seen countless financial advisers devastated by unexpected terminations by their broker-dealers.
Although most terminations can be predicted, some come as a huge surprise, leaving the adviser out of business, in shock and lost as to what to do next.
One common case we handled recently illustrates that even exemplary advisers can be caught off guard by circumstances of which they are unaware, and that all advisers need to know what to expect and what to do should they find themselves in this precarious situation.
Recently, we helped a California-based adviser who, upon arriving to work one day, was terminated and escorted out of the building with his staff. The adviser never had a client complaint, was a top producer and managed more than $85 million in assets.
During a routine audit by his broker-dealer, auditors discovered that his assistant had initialed a document at the request of a client. Despite the adviser's having no knowledge of the activity, he was terminated for cause, and the reason to be listed on his U5 (Uniform Termination Notice for Securities Industry Registration) was “forgery,” a serious accusation.
Like many other advisers in this predicament, he felt paralyzed about what to do next.
Adviser terminations typically prompt investigations by the Financial Industry Regulatory Authority Inc., as well as the adviser's home state and others where he or she is licensed. Investigations can extend over unpredictable time periods, during which the adviser is unable to conduct securities business.
In today's environment, regulators are under so much pressure to investigate every discrepancy that they tend to err on the safe side to protect consumers, leaving advisers who eventually will be cleared of any wrongdoing out of business during the investigation.
BE PREPARED
Advisers in this situation need to ask a couple of questions to determine what actions to take:
Form U5 reporting. When an adviser leaves a broker-dealer, the departure will be documented by the firm on his or her U5 as (1) a voluntary resignation, (2) permitted resignation or (3) termination. Ex- planations on the U5s of advisers citing permission to resign tend to contain much softer wording than those citing termination for cause.
The first question to ask of the firm an adviser is exiting is exactly how the U5 explanation will be worded. Obtain this information immediately, as later on, the adviser may not be able to reach the compliance department, and most broker-dealers won't take new advisers until they know the U5 wording. U5 explanations can be damaging and can last indefinitely, so advisers who aren't comfortable with the explanation received should contact a securities attorney who may be able to negotiate with the broker-dealer on the adviser's behalf. (See “How to protect your CRD record,”
InvestmentNews, Nov. 4.)
Timing. Broker-dealers have up to 30 days to file termination of registration. How soon they file can affect the length of time the adviser is unable to conduct business. Advisers exiting a wirehouse, bank or regional firm typically find that their firms take the maximum amount of time in order to contact and win over the adviser's clients.
Fortunately, the adviser in this story is now up and running with a reputable broker-dealer that was willing to bring him on. The process for registration took just over six weeks, as Finra took the time to learn what actually happened, sending him a letter and allowing him the opportunity to provide his side of the story.
Once it deemed his explanation acceptable, it cleared his registration.
Few advisers ever expect to be terminated, yet time and time again, we have seen the worlds of countless advisers turned upside-down. Although terminations can have serious ramifications, there are ways to get back on the right track and up and running with a new broker-dealer that suits an adviser's needs.
Broker-dealers differ significantly in terms of business and culture, and though it is important to know what to do if terminated, it is even more important to find a firm that you want to establish a relationship with for the life of your career.
Jodie Papike ([email protected]) is executive vice president of Cross-Search, an independent-broker-dealer adviser and executive placement firm.
