The main focus of most advisors is building their businesses. This task has been made more difficult now with the increased pressure from other hungry advisors and the emergence of robo-advisors. Thus, advisors tend to forget that there’s an even bigger threat that they need to attend to: unforgiving and aggressive regulators.
Specifically, regulators can now impact your otherwise squeaky-clean reputation more than ever before with the increasing publicity given to infractions and penalties, which can affect your licence and your employment/agency agreement. Don’t be a victim of regulatory circumstances — be aware.
The reality is that in the past year, individual advisors have been hauled in for what in previous years would have been perceived as minor regulatory infractions. Advisors can’t believe they are being investigated by their regulator for such small infractions associated with completing forms improperly. In addition to the requirement to pay a penalty and suffer the embarrassment and reputational damage associated with online publicity, some advisors’ employment/agency agreements were even terminated.
These infractions included:
- A branch manager stamped a single form as “signature guaranteed” without seeing the client sign the document, for which there’s no regulatory rule.
- An advisor gave a client a series of documents for his wife to sign and not checking the signature on the documents for authenticity or calling the wife to ensure she signed these forms. The signatures turned out to be forged by the husband. The advisor’s book was audited and there were no other infractions.
- An advisor sent a client a form that the client had already signed so that the client could fill in a single missing tick mark. The client then inserted the tick mark, returned it to the advisor, and the advisor submitted the form, forgetting to ask the client to initial the tick mark to confirm that she approved the change she had made as it was inserted after the client signed the form originally.
There are many more cases that are posted online and available for any client or — worse — prospective client, to see. This is clearly very damaging to advisors’ reputations. However, this is even worse for advisors who have other designations, such as the chartered professional accountant or certified financial planner (CFP). This means the bodies regulating accountants and CFPs, also investigate these advisors for the very same minor infractions.
Some of these advisors were terminated and had to find a new sponsor for their securities or insurance licences. The regulator requires that when you have to find a new securities or mutual fund dealer or insurance agency to sponsor your licence, you need to tell them in your first telephone call, email or meeting about the allegations, even if you believe they are minor and/or groundless. If the matter is not resolved with the regulator, there might be great hesitation on the sponsor’s behalf, which means you cannot work in the industry.
However, even if you’re able to find a sponsor to proceed with the application to the regulator to allow you to be registered, the regulator will scrutinize the application, investigate the advisor and circle back to the sponsor to “double check” that it still wants to proceed with the application.
Understandably, sponsors can get spooked as this means their own regulator is questioning their integrity by taking on an advisor who has an unresolved regulatory matter. If the sponsor decides to withdraw the application, the advisor is back in limbo trying to find another sponsor.
Note that even if there’s a sponsor for the licence, and the advisor is permitted to re-enter the industry, there may be supervisory terms imposed — and the sponsor may choose to opt out at that time if it’s not prepared to fulfil such terms because of costs, risks or inconvenience. The advisor is then back to square one.
All this means that you shouldn’t devote your energy exclusively toward building your assets under administration. Instead, I suggest that you focus some of your time and resources to educating yourself to ensure you operate your business in a compliant fashion. The rules change frequently, regulators send out directives in the form of bulletins, and these are then disseminated by your compliance departments. Spend the time to review these changes, ensure you understand them and incorporate them into your daily practice. Otherwise, you will get caught — and it won’t be pretty, as regulators can be aggressive and unforgiving, even if the infraction is minor.
For how you can strike the right balance between following your entrepreneurial spirit and protecting yourself from regulatory risk, read Ellen’s previous column.