Advisor at Risk

Ellen Bessner

Ellen Bessner is a well known, leading litigator with commercial litigation firm Babin Bessner Spry LLP. Her more than 20 years of experience includes defending investment and insurance industry participants, including dealers and individuals at all levels of courts.

The cases involving advisors who tried to find loopholes to boost their AUA and, thus, remuneration, reveal that the system we have in place is effective

By Ellen Bessner |

Many advisors consider assets under administration (AUA) or revenue growth the driving force of their businesses. That's because they are remunerated based on the growth of this number. So, the more the AUA or revenue grows, the more they are paid — and, sometimes, it's an advisor's focus on this issue alone that leads to his or her demise.

Case in point: A recently reported case revealed that an advisor had found a loophole in his dealer's system that led to an increase in his AUA if he entered a preauthorized contribution document (PAC) permitting automatic, regular, withdrawals from a client's bank account into his or her investment account, even if it was immediately cancelled with no contribution made at all.

An astute compliance officer identified the sales abuse during a regular audit and the advisor was suspended pending a full investigation, which confirmed that without client authorization, the advisor was entering, and then cancelling, client PACs into the system. The advisor admitted the infraction, explaining that he was stressed he might lose his job if he didn't meet his sales targets. However, by taking this approach, he was not only terminated by his dealer, but fined and suspended by the overseeing regulator. (The advisor was not registered with any dealer at the time of the regulatory proceeding.)

There are other reported decisions in which advisors have placed their compliance obligations aside in order to meet targets or increase their remuneration. However, there are two levels of supervision — one in the branch and the other at head office — that usually lead to the discovery of the infraction and the advisor's termination and regulatory penalty.

Many outsiders might criticize advisors and dealers when a case like this is publicized. In contrast, I consider cases of this nature reveal that the system is actually working.

Most companies and individuals in any industry are remunerated based on their productivity, but few industries are regulated to the same degree as the investment industry. There are abuses in every industry by employees at all levels who are trying to beat the system or twist a rule or two, but without the two-tier system and controls that the investment industry has in place, many infractions will go undetected. Thus, in the investment industry — and the case described above is an example of this — detection is more likely.

Therefore, advisors must remember that making AUA their exclusive focus while ignoring ethical issues — usually in the form of regulatory and legal infractions — will likely result in their demise. Investors and those who make it a full-time job to criticize advisors and dealers should remember that while nothing is perfect, there are many examples, like the one above, that confirm the current system is working to protect investors.

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