During a recent visit to a financial services firm, attorney and consultant Brian Hamburger came across an adviser who wasn't sending disclosure statements to clients.
Surprising? Hardly. Compliance experts such as Mr. Hamburger warn that advisers frequently fall short on some of the simplest regulatory requirements.
“These guys are just missing the basic stuff," said Mr. Hamburger, founder and managing partner of MarketCounsel LLC. “It's not even the nuanced stuff.”
Mr. Hamburger's company, based in Englewood, N.J., works with 800 advisory firms. During engagements, Mr. Hamburger said, he's come across instances where advisers actually forgot to distribute policy statements to clients — again, a compliance no-brainer. Likewise, he's had cases where advisers needed to redraft their client agreements because they were so poorly written, often missing crucial information.
“That's a huge, embarrassing problem,” Mr. Hamburger said. “You have to go back to every client and have clients re-sign these documents. We've regressed to the point where people are missing a lot of the basics."
Hovig Melkonian, director of compliance at Lexington Compliance, said he can spot red flags merely by walking around an adviser's office.
Often office drawers aren't locked, he said. Sometimes advisers leave papers on their desks or by copy machines. Mr. Melkonian said advisers should never leave important papers out when they leave their desks — even for lunch.
“I always say it's better to err on the side of compliance than not,” he said. “Even during lunch, lock the doors to the office. The last thing you want to do is let someone have access to the office.”
Experts point to a host of other compliance errors as well, including failing to shred important client documents. [To see a slide show of the five biggest compliance mistakes advisers make,
click here.]
And mistakes aren't limited to the workplace. Outside the office, advisers need to be careful about any public presentation they give to clients or potential clients, said Barry Schwartz, a partner at ACA Compliance Group. During such presentations, advisers are required to offer proper disclosures. Mr. Schwartz said the type of disclosure that's required changes, depending on the audience.
For example, an audience of seniors likely will require more disclosure and details than one of financial professionals.
“If you're presenting to seniors or a more retail-type investor, the presentation should operate on a different level of sophistication and with a greater amount of disclosures than if you're presenting to institutional investors," Mr. Schwartz said.
Shop Talk is a regular column detailing how financial advisers run their businesses. The column focuses on unusual or innovative ways to attract more clients. Suggestions or tips for Shop Talk? E-mail Lisa Shidler at lshidler@investmentnews.com or visit the Shop Talk page at InvestmentNews.com/shoptalk.
