Registered Representatives

In the hectic world of financial services, registered representatives and investment adviser representatives are always looking to increase their assets under management. At what cost? Are there situations where you would be better off just saying no to accepting that one additional client?

In my many years of defending representatives and advisers from customer complaints, the unqualified answer is yes; there are situations when you are better off just saying no. Any good risk avoidance program will provide for the proper screening/selection of prospective clients. I have addressed this very issue in a risk avoidance handbook.whistle

The key to this screening process is being able to sniff out the types of clients that you do not want to accept. For example, are you the fourth adviser that this client has come to in the last four years? Does the client profile not fit your personal/company investment philosophy? Does the client have unrealistic expectations on what she is expecting you to deliver?

If the answer to any of these questions is in the affirmative, there should be a huge stoplight in front of you flashing red. Any client who fits any of these descriptions is also the client most likely to bring a claim against an adviser.

So before you take on any client with a little money, be cautious. Are there red flags coming into the relationship? If so, just say no.

Every time that I start a FINRA arbitration, I find myself having the same internal debate; did we pick the right person to serve as the arbitration chair. Unfortunately, you will not know the answer to that question until after your arbitration begins, or, more likely, after the award is issued. FINRA has proposed a rule change to open up the filed for chair arbitrators.Conference Room

Under the proposed rule, attorneys can serve as public arbitrator chair with less experience than they were required to have in the past. Pursuant to this proposal, attorneys would only need to have served on at least one arbitration that went to an award and the complete chair training.

FINRA’s stated purpose for the rule is to “protect investors and the public interest” by increasing the pool of eligible chairpersons. This way, chairs would ideally no longer have to travel to serve as a chair.

In theory, this all makes sense. If there are more available chairs, then investors and the industry will be better served. But will this work?

In my view, much still falls on the parties to critically review the CVs of potential chairs and do your due diligence. Call other lawyers who have had arbitrations with that person. Do some research of the professional backgrounds of the potential chair. After all, just because a lawyer passes FINRA’s vetting processing does not mean that you would want that person as your chair.

If you thought the SEC and FINRA were serious about elder issues, welcome to the Alabama, Indiana and Vermont. Each has focused on elder abuse issues.

These states will have mandatory reporting to state officials in instances involving the disabled or those over 65 years of age. They will also allow advisors to cease disbursing funds from clients and providing advisors with immunity associated with doing so. So what does this all mean?

For one, states are starting to run on the coattails of federal regulators who have made elder issues an examination priority in recent years. In addition, such state laws should be a wake-up call for brokerage and advisory firms who service elder and calculator

The actions of these states should force you to ask yourself; what is my firm doing to prevent, detect and report elder abuse. Although a FINRA proposed rule does not require reporting, its goal is the same because it would allow advisors to designate a third-party to who they can inform of suspected problems.

In the absence of reporting requirements, firms should consider having clients aged 65 or above designate a trusted family member or friend when the advisor suspects that the client may be the subject of some abusive conduct. At that point, you may have a group approach to address suspected abuse.

Firms may also want to consider requiring these elder clients to designate a trusted family member or friend to receive copies of account statements. This way, someone who is “independent” can check an account for irregular activity as well.

Whether you are required to address elder abuse or not, firms should make sure that they are taking special care with their elder clients. Federal regulators and now states are focused on the issue. Are you doing anything to make sure your firm does not get into an elder abuse nightmare?

Anyone in a professional service business, like being a stock broker, have been faced with a client who decides to make a stupid decision. But the issue we all face is when that decision results in the client losing money; who is to be held accountable.whistleblower

Fortunately, the law does not require you to stop a client from making a stupid decision with their investments. As long as a broker-dealer’s advice was suitable and the investment advisor’s advice is in keeping with the fiduciary duty, you should not be held accountable.

But this does not mean a client who has now lost money won’t try to hold you accountable for letting them make a stupid business decision. So how do you protect yourself?

The best way to protection yourself is to send the client a letter or email at the time that the client makes the bad decision. The communication should detail why you think it is a bad decision and the potential ramifications associated with that decision.

At a minimum, you should make a note in your file, either electronic or in hard copy, that the client made the bad decision and that you (presumably) advised against it.

The law should protect you from stupid clients, but make sure you protect yourself. Contemporaneous communication to the client and notation to the file may save you millions of dollars in the future.

Unfortunately, a bad broker does not take on the same attributes as a fine wine. Bad brokers do rarely improve with time.

At least this was the recent message of Robert Ketchum, head of FINRA. But should all brokers who have any pings on their record be foreclosed from the industry? Certainly not, but what should you do?Core Values

The question is tougher when the broker coming to you with some knocks on his record has been a historically high producer for his prior member firm. Surely, there must be more to the story.
In my experience, there usually is more to the story. Just because someone has some marks does not mean he/she is not worthy to be with your firm. But be careful.

Anyone coming to your firm with any pings on their U-4 should be brought on under heightened supervision. This way you can personally assess this person and test the reasons why this person has been pinged in the past. Maybe the registered representative was just the victim of circumstance in the past.

Either way, if you are going to bring someone on with a checkered past, you better be willing to take the time to watch over this person. After all, by bringing them to your firm, you have assumed responsibility for them. Take caution on the front end or be ready to pay the price later.

It was great speaking at the May 17 New York NSCP regional conference on risk issues facing firms where Ernie Badway and I discussed cyber-security, risk issues, regulatory matters, issues involving elder clients and ways compliance personnel can protect themselves.  For those of you who could not make the conference, these topics are frequently discussed in our various publications.  Feel free to access them here and use them as you see fit.  Core Values

In this day and age of instant information and overstretched supervisory personnel, you have to be careful to avoid forgoing a very useful supervisory tool. Meeting face to face with those associated persons under your supervision on a regular basis could mean the difference between routing out rogue advisors and being subject to regulatory and civil actions.Core Values

Face to face meetings are even more important where the people you supervise are in regional offices. In other words, those advisors you do not see on a regular basis. With these people in particular, you must go to their offices for regular visits.

You may ask why it is so important to have face to face contact with the people you supervise. After all, you monitor email and correspondence on a daily basis. The advisor submits her outside business and AML forms on at least an annual basis. So who cares about a face to face?

Believe it or not, people lie on forms. It is easier to lie on paper (real or electronic) than it is in person. Also, seeing someone in their natural environment may make it easier to solicit information from them because they are relaxed.

Face to face meetings also help to show whether a person is living beyond his or her means. For example ,what would it mean if a mediocre producer is now driving a Ferrari? Maybe nothing, but maybe a lot more.

People living beyond their means can be a sign that they have another source of income, legitimate or not. You would never know if there is a potential issue if you did not bother to go to this person’s office for a face to face. That person could be the next Madoff, but you would never know if you only sat in your office and stared at a computer screen all day.

If you are going to supervise, then do it. Never forget the value of face to face meetings with those under your supervision.

Unlike lawyers, especially litigators, the business model of a financial advisor is not dependent upon clients being stupid. Instead, financial advisors depend on their clients making smart decisions after full disclosure and consideration after speaking with their financial advisor. So what do you do when clients make stupid decisions?whistle

In defending brokers over the years, I have seen multiple instances where clients made stupid decisions. From a legal standpoint, there is generally no duty to prevent a client from making a stupid investment decision. It is what the advisor does in response that is the most important lesson to learn.

The mistake is when the advisor ignores his client’s stupid decision in light of an advisor having provided proper advice in the first place. The key thing is to document any instance where your client ignores your advice and does something stupid. A brief story solidifies this point.

A number of years ago, an advisor told his client not to sell his life insurance policy to take the cash out until the client cleared underwriting on a new policy. Of course, the client ignored the advice, went over the advisor’s head and cashed out the policy without clearing underwriting on the new policy. Turns out the client was “deathly” allergic of bee stings.

We were able to successfully defend because of something that the advisor did. He documented his recommendation not to cash out the old policy without underwriting being completed on the new policy.

But for the smart actions of the advisor, this situation would have turned out much differently. It is just as if not more important to document when a client ignores your advice as it is when you give advice to your clients. Doing nothing is never an option.

In the near 20 years that I have been defending financial advisors against claims, many of which brought by seniors, the biggest issue that I have seen is the failure to document the file in a proper manner. Why does this matter you may ask?Core Values

First and foremost, the way a file is documented tells a story about how the advisor managed the relationship. This is even more important now that there is an intense focus on suitability issues with senior investors. The better and more detailed the documentation in the file, the easier it will be to defend against any suitability claim.

Another key is to document all communications with your clients, especially seniors. This particularly comes into play when a client ignores your advice. When a client ignores your advice, an email or letter to the client detailing that action and the consequences for doing so are key, and can mean the difference between winning or losing a case.

One last comment deserves mention. If your file lacks documentation, do not try to recreate it after a client complains. Speaking from personal experience, recreating documents does not end well for the advisor. You can still defend yourself when file is documentation-light, but you can’t when you alter your file.

So remember, it is all in the documentation. Have very good documentation and protect yourself. Don’t document your file and roll the dice. The choice is yours.

FINRA recently barred a registered representative and fined that person $52,270, which represented the commissions he received from the sale of debentures to 12 senior investors. So what was so bad about those transactions?

For one, the high commission investments were not suitable for these elder investors. Second, there were misleading statements made to seven of the 12.
In addition, all but one were retired at the time of purchase. Nine of the ten investors were over the age of 70 at the time of investment. pointing.jpg

This disciplinary action is significant because it enhances two points from FINRA’s 2016 exam priorities. You may recall, FINRA announced that it was going to focus on elder issues and, in particular, suitability of investments.

How should firms address these issues? As I have stated in other blogs, the easiest solution is to put elder clients (those over the age of 65) on something akin to heightened supervision. In other words, someone in a supervisory capacity must scrutinize each and every trade made by one of these investors to ensure investment suitability.This may seem a bit much to manage. There is, however, no denying that FINRA is razor focused on this issue and is not taking elder issues lightly.

So maybe heightened supervision is too much for your firm, but do something. Implement some policies and procedures to ensure that proper steps are undertaken to ensure only suitable investments are sold to your elder clients. Otherwise, expect a call from FINRA.

  • photo from