If you have a clean compliance record, don’t settle for a problematic broker-dealer just to avoid the inconvenience of a broker-dealer change. Switch up to a broker-dealer that has the same high-quality standards you do.
MINNEAPOLIS (PRWEB) March 15, 2018
In his latest article, “Guilt By Association,” independent broker-dealer recruiter Jon Henschen discusses the issue of “clean advisors” at “dirty broker-dealers,” and encourages financial advisors to do their homework to avoid guilt by association.
Henschen opens his discussion by pointing out that financial advisors routinely perform risk assessments for their clients’ portfolios but often ignore the downside of being an advisor with a clean compliance record who is tied to a broker-dealer with problematic compliance and financials. He cautions that compliance issues at the broker-dealer level are an area of concern rarely explored by advisors, but they should be. For example, advisors should know if their broker-dealer is home to a high number of advisors with numerous compliance or credit disclosures.
According to Henschen, as the Financial Industry Regulatory Authority (FINRA) drills down on anything and everything, a broker-dealer in poor standing with FINRA can make life more difficult for all its advisors — even if they have a spotless record. It’s an issue of guilt by association.
To explore this issue, Henschen turned to securities attorney Jim Eccleston of Eccleston Law and asked, “If you are an advisor with a clean compliance record, but you are at a broker-dealer that has a high percentage of advisors with multiple marks on their compliance records, what impact directly and indirectly does that have on an advisor with clean compliance?” Eccleston shares several perspectives:
- First, a firm in poor standing with FINRA will need to endure additional regulatory sweeps and audits. Depending upon the subject matter, these may or may not involve the clean advisor.
- Second, in defending those regulatory audits, the firm will expend additional time and financial resources, which ultimately will be passed on to all advisors.
- Third, if the firm needs to sacrifice a few lambs to please the regulators, morale will be affected and possible management turnover will affect the stability and predictability of the firm’s operations.
To assist financial advisors in their due diligence, Henschen provides tips on how to check a broker-dealer’s record using BrokerCheck (https://brokercheck.Finra.org/).
He also discusses the fact that what constitutes a problematic advisor can differ, noting that for FINRA, most anyone with anything on his or her record is viewed as problematic. However, there also are advisors with multiple serious disclosures showing a pattern of client abuse, and yet some broker-dealers seem to have no issue with such registered reps— if these advisors have high enough production numbers.
Next, Henschen offers the recruiting perspective, listing the criteria used as a guideline to discern what constitutes problematic:
- Any disclosures that show serious negligence or financial abuse toward clients such as churning, borrowing money from a client, forging a client signature or selling away with products not approved by broker-dealer such as a viatical contract
- Multiple marks where fines were paid, reflecting a pattern of guilt but not including disclosures over market loss
- Multiple disclosures regarding credit issues over the last five years (credit issues caused by divorce or medical hardship not as serious)
- Disclosures showing multiple terminations from prior broker-dealers, or “permitted to resign” situations
Another measure used to evaluate broker-dealers is to use the industry average.
FINRA requires broker-dealers to keep track of the compliance and history of their advisors through a Registered Representative Composition Report. The intent of these reports is to make the broker-dealer aware if they are above the industry average in any of the 10 categories that broker-dealers are required to track.
When FINRA audits broker-dealers, they will examine the Registered Composition Report to see if the firm is above the industry average in any of the 10 categories. It’s rather common for broker-dealers to come under heightened scrutiny by FINRA when they are above the industry average, especially if they rank poorly in multiple categories.
FINRA also ramps up the pressure on broker-dealers by auditing them more frequently or restricting their growth until they bring their numbers more in line with industry averages. A broker-dealer in good standing with FINRA will be audited once every two years, whereas a more problematic broker-dealer will be audited once a year.
Henschen’s article also comments on evaluating broker-dealer by size. When doing a compliance review of a broker-dealer using FINRA broker check, small- and mid-size broker-dealers are the easiest to analyze. These also are the most important firms to check as they have less of a capital cushion or deep pocket access and thus are more vulnerable.
If you view the advisors in a large broker-dealer’s home state, you tend to find a higher concentration of advisors with multiple marks that are oftentimes required to be under heightened supervision. This is because it’s easier and less expensive for a broker-dealer to perform heightened supervision on representatives within their home state than it is on those outside their borders.
Problematic advisors at the larger-broker dealers tend to be revealed by a high frequency of press articles noting large fines being paid due to non-complaint advisors. (Perform a Google search on the broker-dealer’s name). FINRA BrokerCheck also will reveal representatives that have been barred from the industry. If you see numerous advisors at your broker-dealer that have been barred, this is a major red flag that your BD is likely rogue in the eyes of FINRA.
Henschen closes by remarking that examining the compliance history of advisors at a broker-dealer is one of three risk assessment activities that advisors should perform as proper due diligence.
The other two assessments involve looking at the broker dealer’s compliance history and at its financials. Reviewing this information gives a clear picture as to whether a clean compliance advisor needs to be concerned about being susceptible to additional legal risk, broker-dealer expenses (such as higher E&O insurance rates) and additional administrative policies/procedures above what FINRA normally requires.
If a broker-dealer has poor financials, there is a risk that it will close its doors due to a net capital violation, leaving advisors with frozen client accounts and a two- to three-month unexpected disruption to find a new broker-dealer.
Henschen’s final advise to financial advisors is this: “If you have a clean compliance record, don’t settle for a problematic broker-dealer just to avoid the inconvenience of a broker-dealer change. Switch up to a broker-dealer that has the same high-quality standards you do.”
Jon Henschen is President of Henschen & Associates, an independent broker-dealer recruiting firm located in Marine on St. Croix, Minnesota. With more than 20 years of industry experience, Jon is a staunch advocate for independent financial advisors, and is widely sought after by both reps and broker-dealers for his expertise and advice on independent broker-dealer topics. He is frequently published and quoted in a variety of industry publications, including ThinkAdvisor, Investment Advisor Magazine, Wealth Management Magazine, Financial Advisor IQ, Financial Advisor Magazine, Investment News and others. For more of his published work, visit Jon's website.