I recently spoke at a securities industry conference on how to stay out of trouble. Of course, it’s impossible to give this topic the justice it deserves in an hour. The number of questions and stressed out attendees, along with what happened after the presentation, reminded me why I wrote Advisor at Risk: A Roadmap to Protecting your Business in 2008 as well as why I stopped doing process reviews.
When I started speaking regularly at conferences in the early 2000s, I was frustrated by how little I could convey in a one-hour presentation. So, I decided to write it down and publish a book. That book became a best seller and advisors found it helpful as it described many processes to follow to stay out of trouble.
However, I was, and continue to be, approached by advisors on a regular basis, particularly after speaking engagements, asking me to “trouble proof” their business. I tell them it’s all about establishing processes and following them. Most have read my book by now but they wanted more; specifically, they wanted me to come to their offices, review their processes and tell them where the holes were and tell them how to patch them up. This was not going to be difficult for me to do. So, I set up my own process. First, I developed a questionnaire that gave me an overview of the type of business, the type of products, the number of people on the team and also the assets under administration. It was based on the answers to the questionnaire that I would price their customized process review (CPR), which is what I decided to call it.
My first customer was a big producer at a large securities dealer who had won prizes each year and had a huge and successful business. He approached me and I sent him the CPR questionnaire. Through our preliminary discussions, I learned the advisor believed that he had great processes and staff who followed these. I was convinced that I would find everything in good order. I was wrong.
After the advisor sent me back the questionnaire, I went to his office to meet with him and his assistant to review his processes and a couple of his largest files to see how or whether he followed processes. I learned that he had the staff, he had the software and hardware but he was not following processes. I reviewed his files and the know-your-client process he told me he was following, but it was not at all evident from his paper trail — actually, there was no paper trail — that he was following any processes.
I found this to be strange because the advisor had specifically told me of his note-taking and filing system, but his assistant confirmed with me that this didn’t really exist or was not being followed. I had to break the news to him and it wasn’t pretty. I told him that to clean this up and install processes, I would have to come back and work with his assistant and then meet with him again so that they could form a team and follow processes installed. He told me that he would follow up with me to schedule this next phase but he never did.
I gather from that experience that the advisor wanted me to just tell him that he had good processes and go home. He was practising what I call The Ostrich Phenomenon: he was hiding his head in a hole fearful of the worst and hoping for the best. I stopped offering the CPR after that experience. I was busy with my law practice and providing live training and I didn’t want to try to fix things for people if they were not committed to it or fearful of change.
However, after I completed the presentation during my recent speaking engagement, the same experience happened again. An advisor wanted me to do a CPR to help him close the gaps, but after he filled out the questionnaire he put the project on hold.
The fact is that many advisors know they have some gaping holes that they’d better close before the regulator finds them or they lead to a client complaint. I know change is scary but leaving yourself exposed is worse.
In the ever-changing and regulated investment industry, you need to keep up with the changes and install processes to ensure you are not in violation. Pretty much all advisors I represent didn’t set out to violate the rules, regulations and laws but it was done inadvertently. So, although I no longer offer CPRs, I strongly suggest that you install systems in which you stay on top of changes to your dealer policies, regulations and laws to ensure you are compliant. Look deep into the gaping holes and patch them up. Don’t practise The Ostrich Phenomenon.