Advisors and dealers need to be on red alert for client instructions that might later lead to trouble, including having to write a big cheque or answer to regulators. Thus, you need to be mindful of how to detect such trouble before it occurs and what to do if something just doesn't seem right.
Although certain circumstances may seem quite normal at first blush, you could find something untoward if you dig beyond the instruction's surface. Examples include receiving instructions from a power of attorney (POA) with whom you've dealt with on several occasions, but the sum of the redemption is somewhat out of the ordinary this time. It could also be that a client gives you instructions on a trade that's clearly outside his or her usual comfort zone, but arguably consistent with the risk tolerance on the account application form. Is there someone coaching or prodding the client? Is he or she trading on inside information?
Unfortunately, the securities industry moves at a speedy pace, and transactions are generally rushed, so time is not usually on an advisor's side. This makes it doubly difficult to identify problems as they arise. So, although it's important to develop a sixth sense to trouble, it's even more important not to dismiss a tiny concern when it arises, as the natural tendency is to dismiss it and carry on. It's that propensity to sweep initial concerns under the rug that leads to trouble for advisors and dealers. This is because regulators and judges examine the evidence of what occurred, and with hindsight being 20/20, concluding that the advisor or dealer ought to have identified those first few hints of potential trouble looming and investigated.
Think about the aforementioned examples — as well as other circumtances — to educate yourself on what to look for in order to identify instructions that may be untoward. Then, discipline yourself to stop and examine the instructions received. If there's a hint of an issue, you need not sound the alarm bells. Instead, you need to manage this, delicately and politely, but persistently, while developing a paper trail confirming that you didn't ignore the issue. The key is to ask the right questions to probe into the matter instead of barging in guns blazing.
Examine the path behind you. Have the transactions been edging into a suspicious sphere? If one transaction is examined in a vacuum, it may not prove to be of concern, but if you examine the path, it might paint a picture that raises red flags. Furthermore, if you ask your client questions delicately, particularly if you have a good relationship with the client/POA, you can engage them in dialogue. Remember that there's nothing that replaces dialogue, not even email. A conversation may give you insights into the matter and understand the client better as a result. Then, if you are satisfied with the explanations, and your concerns are resolved, keep a paper trail of your conversation and remain on the lookout.
For example, when you ask a POA why the redemptions seem to be increasing each month, there may be medical bills and other expenses that have increased due to the elderly client's degenerating medical condition. You may ask for back-up materials, explaining that these will protect both of you down the road from facing allegations from others, such as beneficiaries of the estate who inquire about the amount of money in the estate, having expected to receive more. Even if you're satisfied that there are no issues of concern, don't just close the book on it and move on, continue to keep an eye on the account and ensure it's managed in the client's interest.
However, if the client or POA's answers don't fit or continue to present red flags, you may need the help of compliance, someone objective and trained to take a closer look and to direct you on next steps. If the compliance officer says all is fine, then that's a bit of an insurance policy, especially if the regulator later inquires about whether you fulfilled your duty. However, again, keep on red alert so that if the problem worsens, you don't ignore it, but raise it again.
As the area of law concerning an advisor's duties when taking instructions from a POA is developing, dealers don't want to be the "test case." That puts them at risk that the law could develop in a manner that requires them to pay substantially in respect of damages to the client, as well as the client's lawyer's fees, not to mention reputational damage. It's for these reasons that advisors and dealers usually decide that it's better to write a cheque than spend the time, money and resources on protracted litigation or regulatory hearing.
So, be on alert for suspicious instructions, don't sweep concerns under the rug and don't examine these in a vacuum. This will protect your reputation and pocket book.