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|Posted on November 16, 2017 at 1:13 PM||comments (0)|
Each year as we approach the annual update of disclosure documents for investment advisory firms, there seem to be more requirements and new questions to answer. The annual update due by March, 2018, is no exception.
One of the biggest changes is the level of detail required to report the client assets we manage. In the past, Form ADV Part 1 asked for the total of assets under management as of year-end and a general description of the types of clients served by showing a percentage range for clients in various categories. This coming spring, we will need to state the precise number of clients in each applicable category together with the amount of assets under management for each client category.
Although this information should be readily available to each firm, reporting those actual breakdowns will almost certainly require firms to set up a new process for ensuring we have those numbers and that they are correct. It will take a bit more time and likely also require a quick review or cross-check of the numbers to ensure we have it right for the filing.
Other expanded asset related requirements include reporting information about managed assets – requiring firms to report how much they manage in specific categories of investments, whether they use derivatives or other borrowings and more. Where firms have multiple locations, additional information will be required and, not surprisingly, specific information about social media platforms used by a firm and its investment adviser representatives.
Finally, copies of advisor communications – specifically those to clients with investment recommendations or “marketing” information such as calculation of rates of return or performance – must ALL be archived and available to the regulators for review on audit or other activity.
These changes all seem to be an expansion of the requirements already in place and will make much more data available to the regulatory bodies for a variety of uses. The burden on advisory firms will be noticeable because of the changes and additions of information required. It is time now to begin thinking about preparing for that annual update.
|Posted on July 8, 2017 at 2:33 PM||comments (0)|
When things tend to slow down in the summer, with many folks going on vacation or pursuing family time, their focus is not so much on doing business. This means that it may be a good time for you to work through some of the more tedious and oft-neglected tasks that are a part of your own business, at least when you are not taking family time as well!
Filing and organizing the paper and digital material that flows through your office on an almost continuous basis is a good way to not only catch up but also to tip you off to things you may need to follow through on for both your clients and your business. Planning updates you have neglected, meetings postponed, decisions about technology and other similar tasks will benefit from your attention.
Summer may also be a good time for compliance matters, ranging from testing your systems and procedures to reviewing processes and documentation to make sure everything is up to date. You may even want to consider an independent audit of various aspects of the business which can allow you to be proactive and take steps to improve your situation.
Another task that works well during the summer doldrums, even if you are “on vacation”, is to take the time to catch up on your business reading backlog. If you are like most of us, there are articles, books, blogs and other items relating to your work that you would like to familiarize yourself with and even enjoy without the every-day pressures of clients, vendors and more asking for information, decisions and the like and so keeping you from that lower priority reading task
If you are like me and many of my colleagues, there is a summer slowdown in business demands and there is plenty we should be thinking about handling in that “spare time”. Have fun and take advantage of that lower stress and pressure.
|Posted on June 7, 2017 at 4:38 PM||comments (0)|
The DOL fiduciary rule may – or may not – come into play in some form this month, depending on several factors which are not yet fully known. But while we are waiting to see what happens, let’s consider what the benefits and detriments of the rule might be for the folks who are ostensibly to be helped by the implementation of the rule.
First, the easy one – the best interests of the investor must be the priority of the advisor or broker who recommends a particular investment for a retirement plan account. Sounds great, doesn’t it? However, like many other things in life, the easy one is not really all that easy and what is in the best interests of one investor may very well not be in the best interests of another.
One focus of the rule is on compensation of the advisor and common wisdom on this item is that level compensation – meaning the same rate is paid to the advisor for any product of a particular type recommended to an investor – is consistent with the best interests of the investor client. How can that be? Products, like investors and advisors, are all different. Does this “rule” mean that an advisor compensated at, say, 1% of the value of the investment in each of two different investments is acting in the investor’s best interests in making the recommendations of those investments because of that equal rate of compensation? Hardly. One product could be a poor performer, carry negative tax consequences or be subject to substantial risks while another product, at the same advisor cost to the investor, could carry less risk, meet investor tax objectives or outperform most products in its category. Clearly, these products – for which the advisor compensation is the same – are not the same with regard to how they might work with the investor’s portfolio and goals.
Saying that equal compensation to the advisor equates with meeting an investor’s best interests is naïve and misses the point almost entirely. All it says is that an advisor would not be making a particular product recommendation based on the advisor’s own compensation, which seems a good thing, but it does not mean that a recommendation has anything else to do with the investor’s interests. Bottom line, an advisor’s compensation very clearly should be a factor in evaluating how the advisor is serving an investor but it should not be the only factor or the controlling factor – investing is just not that easy.
|Posted on March 15, 2017 at 5:06 PM||comments (0)|
We make decisions every day – large and small – and most of the time we consider various factors and have at least some basis for those decisions. When we are in business, and particularly where that business is subject to regulation, there is something we can do about the process that will help us both now and later. That something is as simple as making a note of the decision we made and a brief summation of the reasoning.
Well, that takes time and energy you say, and you need to address other things. Besides, where would you keep all those “notes” anyway? Like many things in life, once you make a habit of noting down what your decision was and why, it becomes easier and faster. Notes can be kept in a CRM tool, in a spreadsheet, in a document, wherever you are most comfortable with it.
But most importantly, you should understand that there is very little that you need to address in your business that is more pressing than making that note on a regular basis. When you have a process attached to your decision making, that fact makes regulators and you happy. Your reasoning is recorded contemporaneously with your action so that at a later date you or an auditor can understand what was done and why. This is certainly easier and more convincing than trying to remember and make up something to address the point when it is raised at a later date.
Furthermore, those notes allow you to be consistent in that decision making by revisiting a prior decision note when you are faced with a similar situation in the future. Knowing how you landed on the previous issue and why helps you to make the decision about that similar issue now. It also leads to improved decision making based on how those previous decisions worked out and how this new one might be a little different in light of experience.
So make a note of it – at worst it will help you to improve your decisions over time and at best it will protect you from problems with clients or auditors in the future.
|Posted on March 8, 2017 at 9:45 AM||comments (0)|
A while ago, we talked about “reading the fine print” and why that may be important for any consumer to do. With all the discussion in the news about the proposed DOL fiduciary rule and its pros and cons, another aspect of that fine print has come to the fore. Rules and regulations are often created to protect certain groups and in the financial industry, other than protecting the jobs of the writers of such rules and regulations, the ostensible primary targets of the protections proposed are the consumers of the financial industry products and services – our clients.
Clients should understand that compliance with regulations comes at a cost to the regulated business and that the additional cost of doing business due to the regulations will be passed on to the customers of the regulated business. Just as an increase in office rent or utilities may be passed on through higher charges to the customers of a business, if the increase cost of compliance cannot be compensated for by cuts in other expenses, that increase in compliance costs will eventually trickle down to the customers of that regulated business.
That fact shows us that there is another good reason for consumers to read the fine print: you are paying for it. The regulation is intended to protect you by advising you of various facts and concepts regarding products and services and that is why it must be included in the various communications and agreements you receive and enter into with a regulated business. If you do not read that information, you will not necessarily be aware of the things you should be in making your decisions about working with that business.
But whether you read the fine print or not, you will have the cost of that compliance included in your charges for the services and products you buy. Doesn’t that encourage you to pay attention to what is being disclosed in the fine print? Of course, the final catch to all of this is that there is no guarantee that what is disclosed by a regulated business is in fact true and complete. That is what makes everything just perfect for the consumer.
|Posted on November 8, 2016 at 9:28 AM||comments (0)|
Social media is at the forefront of activity for many people, whether for personal, business or other uses. If you are in business or interact with businesses using social media, it may be helpful – and in some cases is absolutely necessary – to keep track of what you are posting and sending to others. Naturally, most of us want to ensure that what we are saying through social media is appropriate and will not subject us to negative reaction. However, that can generally be handled simply by thinking through what we are posting before we do it.
In some situations, though, it is necessary to be able to prove what we have said or sent. An investment adviser, for example, is required to maintain records of all communications to or from clients. This information may be required by auditors and may be necessary in the event of a complaint or claim made against the adviser. The same sort of thing can happen to an individual in their dealings with all types of businesses; proof of what was said can help clear up a misunderstanding or more serious problem.
Keeping track of these various forms of communication can be daunting to many of us, particularly those who are involved in a high volume of such activity. We can archive our e-mail exchanges fairly easily and know that the material is readily accessible when needed. However, it may be more challenging to keep track of all we have on Facebook or even Twitter, for example. Other forms of social media, famous for quickly disappearing, can pose huge problems in the business world if there is no proof of the nature and timing of the communication. Software is available to address these issues and if you are at all concerned about the potential need to show what you really said at any given point, it would behoove you to pursue such tools.
Bottom line: Unless you are above the law and any challenge, it is wise to not only be careful of what you might say in social media, but to keep track of what you actually did say and when. This can protect you in many ways and may actually be a legal requirement for some of us.
|Posted on May 22, 2015 at 10:40 AM||comments (12)|
The news headlines and stories, the pictures and video clips, the online postings and even the tweets of millions are to be found practically everywhere these days. Whether involving celebrities or politicos, human interest and tragedy, silly or strange or just plain stupid, information about us is available and may, as they say, go viral. There is no certainty of privacy just about anywhere and you are almost certain to know someone who has received unwanted publicity through social media and its being repeated by the mainstream media.
Knowing the omnipresence of devices that can capture practically anything we do should, one might think, encourage us to be more careful in what we actually do. Watching the TV news assures me that the threat of a viral presence on media does not deter most people who we see “caught on camera” along with the many more that don’t make it to your TV screen.
There is a special need for care and forethought by those of us who serve others by providing advice and counsel. In this business, reputation and appearance have some real meaning and need to be nurtured and protected so that we may function appropriately. This need goes beyond simply behaving ourselves so that we are not popping up on TV or the computer screen in unfavorable circumstances. It extends to what we say about ourselves – and others – on our websites, our postings, even our tweets. For example, in the investment advisory business, it is generally a very bad thing for an adviser to post or quote endorsements by clients since that form of self-promotion is a violation of the advertising rule.
Even worse might be disclosing personal information about a client or confidential information about a business or financial situation. Harm may be done when we are careless about what we “put out there” whether it is by a deliberate act on our part or simply being overheard and quoted (or misquoted) by someone who was not intended to be a part of the conversation.
In short, be very careful about what you are doing, saying, texting, posting and so on. It may be used in ways you did not intend or foresee and could lead to trouble for you and perhaps others.
|Posted on April 24, 2015 at 10:12 AM||comments (0)|
Among the many compliance concerns facing investment advisers, one that is getting much more attention these days is how one addresses what happens to the business and especially its clients when the adviser is no longer there. Whether an adviser is retiring, becomes disabled, dies or is required to leave the industry, there is a concern about what happens to the clients and the continuity of advice available to them. Regulators are looking more closely to see what advisers have in place and, at a minimum, are requiring some clear statement in that regard.
Although akin to the idea of having a disaster recovery plan, the requirement of a succession plan is somewhat different. A business interrupting disaster may or may not occur on your watch but it is certain that at some point you will no longer be active in the business for whatever reason. The well intentioned regulators want to be sure that clients are not adversely affected by these events and want you to be prepared as well.
One of the biggest concerns will be who – individually or as a firm – has been chosen to step in for you when you are out of the picture. Since you have some control over that today, while you are active in the business, it makes sense to get that due diligence done and a back-up in place. In this fashion you will be able to know that your clients will likely be served in the way that you prefer and will no doubt provide information to help your successor understand those clients and their needs/preferences.
Another big concern which is not really the point of the regulators is how you will protect yourself or your survivors financially when you leave the business. Your business has value and whoever takes it over will have the benefit of your effort and knowledge. Understanding that value and negotiating an agreement that protects you as well as your successor is critical to the plan working and is quite apart from the obvious need to protect the clients. You may want legal and/or tax advice on any such agreement but it is important for you to make sure there is an agreement that makes sense. Otherwise the succession plan will not have much value to you.
Think about it now and act sooner than later because, as you already advise your clients, being prepared for the future is essential with or without the accompanying regulatory requirements.
|Posted on March 3, 2015 at 8:50 AM||comments (0)|
Most advisers take time in March to attend to compliance matters, including the annual update of their disclosures in Form ADV Parts 1 and 2. Another compliance matter, often overlooked, is the performance of the advisory firm’s annual risk review. One might think that with all the time spent on compliance matters this is just another burdensome task. However, the annual risk review can be a very positive experience for the firm and its members.
The risk review typically is an internal document that is not required to be filed with the IARD, SEC or other regulator. It should identify real risks to the firm – such as the obvious disaster recovery planning we all must do – and ways in which the firm’s processes and personnel can act to reduce the likelihood of a risk manifesting or the impact of that risk on the firm when it occurs. Like many tasks, this is easier said than done.
You are probably thinking something along the lines of “and just how isn’t this burdensome” or “how can I make this easy”. Here are some thoughts on how you can make that annual risk review a positive. Think of the process as a chance to evaluate your business from a different standpoint than you usually employ. Consider items such as
· What is inherently risky about the processes you use? This looks at items such as frequency and manner of trading, discretion over client funds, custody, the role of cash in the business, products recommended or sold, and the like.
· What might be risky about your personnel and their roles? Here we consider potential issues such as insider trading and personal accounts, embezzlement, failure to keep records, social media usage, stealing client information, and so on.
· Finally, what are the general business risks you face? These might include the aforementioned disaster recovery planning, as well as issues with third party vendors of goods and services, the markets and the economy (yes, we all have to keep that in focus), changes in the laws and regulations applicable to you and a long list of similar concepts.
Where I see the blessing in all this is the ability to see where your firm, its personnel and processes are in good shape and how minimal the actual risks may be. Taking the time for the risk review sends a signal to your employees, clients and yourself (not to mention regulators) that you take the business seriously and will continue to employ, serve and protect them all.
|Posted on July 9, 2014 at 9:45 AM||comments (0)|
We hear a lot about conflicts of interest, usually in the context of how someone else has used their position for personal benefit as opposed to the goals of the person or entity for whom they ostensibly are working. Before condemning others, though, we should probably try to understand the nature and effects of such conflict as well as how we might address them.
First, how and when does a conflict arise? It might be said that many conflicts of interest are inherent in the relationship we examine. An executor who is also a beneficiary of an estate, a broker or insurance agent selling products to clients, a used car dealer and prospective purchasers – in each case the former has an interest that may well conflict with the latter’s best interests, even when it is one and the same person like the executor/beneficiary. One naturally wants the customer/client to purchase what is being offered, whether it is advice, products, services or almost anything else. But if the customer/client does not know how the seller benefits or is interested in the transaction and does not know what the difference is among realistic alternatives, the conflict of interest might nudge the seller towards emphasizing the positives and ignoring the negatives of the transaction from the customer/client’s standpoint. And the customer will not fully understand the motivations of the seller, perhaps believing that the seller has his or her best interests at heart when the seller clearly does not.
How might we best mitigate the conflict of interest so we can proceed? In the financial industry, broad written disclosures of potential conflicts of interest are required to be provided to customer/clients. Other business often provide disclosures to their customers. Human nature being what it is, many of them do NOT read or understand the disclosures and so they have no real impact. Verbal explanations also likely fail because people are unwilling or unable to take the time and have the knowledge to understand them and explanations always might be deficient either deliberately or accidentally. That said, education and the light of day are the best tools to address conflicts of interest. If a customer knows and understands that the seller is going to make money if the customer accepts a recommendation and that the seller is going to make even more money if the customer accepts a different recommendation, then selecting either is an informed decision and the conflict of much less importance.
We will discuss conflicts in more detail in a subsequent post – but for now, remember that conflicts are everywhere, some are more important to address than others and our best bet to handle conflict is knowledge.