23 Quick Compliance Tips for RIAs | Lord Abbett

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Practice Management

Compliance often is the least-favorite—and most critical—activity for advisors. 

This Practice Management article is intended for financial advisors only (registered representatives of broker/dealers or associated persons of Registered Investment Advisors).

Many in the planning industry are not big fans of compliance. Cindi Hill is one of them. A former advisor, Hill made the choice to sell her Registered Investment Advisory (RIA) business and focus on helping other firms as a compliance consultant.

"Compliance is challenging; it has all these things that you don't understand, that have nothing to do with your clients," Hill says. "But if they shut you down, it has everything to do with your clients."

At a brief but thorough session at the NAPFA annual conference in San Diego in May, Hill offered several compliance tips for advisors. Here are 23 highlights:

Deliver Form ADV 1 and 2. These are the first things regulators will look at, Hill says, so be very careful about what you say. Advisors must give ADV part 2 to every new client within 48 hours. Clients get five days to rescind and get all their money back.

Update ADV annually. Every year in the first quarter, firms must complete the annual updating amendment. Review parts 1 and 2 of Form ADV and make any necessary changes, she says.

Watch your word choice. "Think about the words you are using in the website," Hill urges. Don't use "unbiased" or "no conflicts of interest"—everyone has a bias and everyone has a conflict, she says.

Designate a chief compliance officer.  Every firm must have one. This person—you, if you are solo practitioner—must be competent and educated in your state's rules, Hill warns, and this is not such an easy task.

Treat examiners like people. Examiners are going to ask you questions, and you may not know the answers, Hill notes. Be willing to say, "I don't know" or to ask questions. And Hill urges planners to be polite: "These people can shut you down and you're treating them like that?" she asks rhetorically.

Pay attention to state rules. "Every state has its own compliance requirements," Hill says. State rules sometimes look like SEC rules, but not always, she warns. A big thing to watch for now is a business continuity rule from some state regulators.

No testimonials. Be careful, Hill urges, there are many different things that can be counted as testimonials. Endorsements on LinkedIn, for instance, are not allowed.

Manage social media with care. Your LinkedIn profile page and company page are considered advertising, Hill says, so watch what's on there. For Facebook pages, if your business name is on it or there is a social media feed from your business displayed, that's advertising. If you keep the page personal, Hill warns, "don't be too specific about what your firm does."

Keep a complaint folder. Look up and follow the definition of complaint in your state, she says, and if you're not sure whether an email or other communication fits the bill, put it in the folder.

Be careful what you say to the media. Advisors should avoid mentioning specific mutual funds or products in articles. If you do, Hill says, you must meet various requirements—such as disclosure—and that's difficult to do in an interview.

Understand advertising rules. Most states follow the SEC's rule, but be careful, Hill says. For instance, you can't say "approved" or "registered" without following specific instructions listed in the form ADV. Advisors should also keep an advertising folder with all advertising material.

Keep files. Be careful about what you remove, Hill says; you need to keep at least two years, but examiners can look back five. Do not hand over documents older than five years, she says, as that can result in fines.

Keep emails. Be aware of how you're going to give them this data, Hill says. They usually want .pst files, and typically they ask for a range of time, but they can ask for up to five years.

Record every transaction. You'll need a record for each client that chronicles every transaction ever made, Hill says. And if you don't track this yourself, you'll need to know how to pull the information from a custodian's account.

Trading in client accounts. If you do this, you must be able to show what authorizes you to do so, she says.

Solicitor registration. Follow state rules for this. If anyone is soliciting business for you, Hill says, make sure they are registered as needed based on state rules.

Cybersecurity safeguards. This is going to be a big area advisors must pay attention to. Make sure to educate your clients about these issues, Hill says. "Clients are your weakest link; if they open up your firm to being hacked, you're in trouble."

Code of ethics rules. Not all states have them, Hill says, but some states do have rules about transactions that advisors must adhere to.

Privacy notice. You must send this to every client every year along with ADV part 2. "Snail mail is okay," she says, but to send electronically, advisors must first have permission and documentation from the client agreeing to receive that type of communication.

Client contract. This must include the services you provide and your fee schedule and whether you offer services to other clients. These should also include when the agreement terminates. If you take discretion, it is assumed you vote proxies unless you state otherwise, Hill says.

Arbitration clause. Find out what your state requires, Hill urges. Don't use someone else's, because it changes frequently, she says.

Disclosure. You must have disclosure or a visible link to your disclosure on every page of your website.

Act like a fiduciary. More than a standard, "fiduciary is a lifestyle," Hill says, and advisors should look at everything through that perspective.

— Samantha Allen



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