Posted in: FINRA | SEC | Greedy Brokers | Breach of Fiduciary Duty | Risky Investments | Variable Annuities |
InvestmentNews interviewed financial compliance experts who said financial advisers frequently fail to meet “some of the simplest regulatory requirements.”
These experts, who are hired by financial advisory firms as compliance consultants, also told InvestmentNews of the five biggest compliance mistakes advisers make. While the article primarily focuses on the effects that these non-compliant employees have on their respective firms, the following notes how these violations would affect investors.:
1. Keeping Lousy Records
This one is a no-brainer. Not only are records and statements important for preserving a healthy client relationship, but also prove financial misconduct.
One expert interviewed in the article, Brian Hamburger of MarketCounsel LLC, has come across advisers who have forgotten to distribute policy statements to clients. In other cases, client agreements were so illegible they needed to be re-written, or were missing information.
Since there is no written policy agreement, or a workable client agreement, clients for these advisers are opening themselves up for trouble.
2. Stretching The Truth On Business Cards
According to SEC rules, a financial adviser is not permitted to put RIA after their name - though some do - because it applies financial expertise.
But generally, it is dangerous for financial advisers to embellish any part of their resume or background to investor, whether or not it includes business cards. Clients are meant to trust a financial advisor not only for personality and ideas, but also for background and experience.
As mentioned last week on this blog, a 29-year-old former broker with Merrill Lynch & Co. was charged with defrauding the firm by embellishing his resume. After the broker claimed in his entrance interview that he was partner at Maxim Group, he was given an up-front loan of $780,000.
A broker’s reputation is undeniably important. Firms dole out massive loans to recruit top talent. Conversely, broker’s poor performance or disciplinary record can decrease their chances of recruiting clients-and with good reason.
3. Failing to Review Client Goals
Congress is still deliberating over a provision of the financial overhaul legislation that will force all financial advisors - including stockbrokers - to a fiduciary standard. This means all of these financial professionals would be required to put their clients’ best interest first, rather than simply recommending them “suitable” financial products.
Breach of fiduciary duty was the most common type of arbitration complaint filed in 2009, with 4,206 claims. If a client wishes to invest conservatively, a financial adviser should not recommend risky products that ultimately lose a lot of money.
When brokers and financial advisers are willing put their clients’ investments at risk, it is likely to earn them high commissions.
4. Forgetting to Shred
It may seem silly having to tightly enforce a firm’s documents, but these rules are solely designed to protect a client’s privacy.
Last year an assistant at Citigroup was barred by FINRA for stealing $850,000 from clients. Somehow, this assistant got her hands on confidential client records, which gave her access to those accounts. Tamara Moon, of Redwood City, California, then forged customer signatures to transfer the money into her private account.
If you wouldn’t want your financial statements lying around your office, you would not want them lying around your broker’s office.
Another expert interviewed by InvestmentNews, Hovig Melkonian, has caught advisors leaving important documents on coffee machines, and left out in the open when they leave for lunch. Other times, desk drawers are unlocked; meaning anyone in the office can get to the documents.
5. Overdoing it On the Marketing
Financial advisers are not allowed to use testimonials from clients on their Web site, and they must be careful with any language marketing their financial products.
Financial marketing regulations keep advisers honest and clear when recommending products. If clients are being told to invest in products, especially risky ones, they need the terms of the investment to be properly explained.
When a broker fails to disclose to a 75-year-old patient that their variable annuity will be illiquid, and unprofitable, for 30 years, there will be a problem.
While it is important to regulate any financial adviser’s activity, it is the marketing that attracts investors to an adviser – or perhaps a certain financial product – in the first place.
