If there’s one New Year’s resolution advisors should make, it’s the need to strike the right balance between following their entrepreneurial spirit and protecting themselves from regulatory risk. That’s because advisors, as entrepreneurs, tend to favour the old bottom line, paying less attention to compliance obligations, thus risking their licences, reputation and businesses in the process.

An entrepreneur is someone who manages a business with initiative and takes risks. Independent advisors are a clear example of this as they invest their own capital to pay for office premises, staff and other business expenses. However, even advisors who are not independent also can be considered to be entrepreneurs as they operate, manage and take initiative to grow their businesses — also taking risks. Furthermore, most advisors are paid strictly on a commission basis, which poses additional risk.

The problem is that advisors don’t always appreciate the implications of the compliance risks associated with this highly regulated industry; and so, they take these risks without too much thought. Let’s explore some of those risks in depth:

1. If advisors fail to comply with the industry’s regulatory, or their legal, obligations, their dealers may decide to terminate the employment or agency agreement, which usually has a clause that permits them to do so on just a few weeks’ notice. Finding another dealer — and getting the regulator to agree to renew or transfer your licence to a new dealer — can be a huge hurdle that could take months to resolve.

2. When regulators ask you what you did to educate yourself on products, changes to regulations, or internal dealer policies, are you able to prove that you fulfilled your duties to know, understand and follow these rules? If not, these will be admissions that you might not be sufficiently proficient as an advisor, which is one of the regulatory requirements to be an advisor. Furthermore, if you signed anything indicating you reviewed these materials, but did not in fact do so, that will affect your integrity, which is another criterion to determine if you are fit to be a licenced advisor. In turn, regulators may refuse to transfer or renew your licence if they deem you to be unsuitable, or impose terms that dealers may not be prepared to follow. So, you lose your sponsorship as a result.

3. Worse, however, is if you are permitted to retain your licence but are penalized. Any regulatory proceeding will result in public proceedings. This is regardless of whether it’s resolved through a settlement or a hearing on the merits — no matter how small, how well-intended, or that clients were unharmed and didn’t complain. These public proceedings not only impact your reputation and your licence, they give your competitors ammunition to encourage existing clients and persuade prospects to retain them and not you. This is an entrepreneur’s nightmare.

Many advisors are lulled into a false sense of belief that they’re protected by relying on their compliance departments and supervisors/branch managers to keep them operating in a compliant fashion. These advisors are wrong.

Compliance officers and branch supervisors are responsible for several advisors and, sometimes, several branches; as a result, they cannot know what every advisor says in every meeting, telephone call and in every email or letter.

Although this is frustrating, you need to ensure you’re protecting yourself. Here are some key considerations:

1. Understand there are internal and external rules:

a. Internal rules are in the dealer’s policy manual; every advisor signs a document annually attesting that he or she has read, understood and will follow the rules in the internal policy manual.

b. External rules that regulators have imposed.

Do you read your dealer’s internal policy manual and the rules regulators have set, while paying special attention to provisions that pertain to your line of work? Do you understand them? Do you obtain training on the important and challenging areas impacting your line of work? Do you obtain continuing education and training on any and all new provisions?

2. There’s a lot of material you must read. These include:

a. The sections in the dealer’s policy manual that impact your business.

b. The bulletins that your compliance department circulate regularly.

3. Incorporate this reading into your daily routine as there’s no end to it.

4. Educate your team — especially support staff. If the others in the office are operating in a compliant manner, that will set the tone for the office. More importantly, though, support staff can catch your errors if they’re educated on what to look for.

5. Establish processes to ensure your office is operating in a compliant manner. If your team understands the rules, they can help identify risky areas and design processes to help.

Finally, don’t practice the ostrich phenomenon and stick your head in the sand, hoping you will never have any of the aforementioned problems. Start 2018 with renewed energy to protecting your business and yourself.