Top Compliance Headaches for Financial Advisors

Financial advisors today are required to navigate increasingly complex waters when it comes to regulatory compliance. Those who choose to ignore the rules can find themselves in hot water with the FINRA, SEC, DOL, and state governments. They also may face punishment or suspension by boards of standards that govern any professional designations that they might hold.

Even those who follow the rules to the best of their abilities can still step out of bounds on occasion. The digital marketplace has also opened up a whole new arena that comes with its own set of rules that must be strictly obeyed.

Here are some of the biggest compliance headaches that advisors face in today’s marketplace. (For more, see: Ways Advisors Should Evolve.)

The Time Suck

The digital revolution has made compliance issues more numerous and complicated than ever, and keeping up with them can sometimes feel a full-time job. Some advisors say that they spend an aggregate average of one day per week dealing solely with compliance issues. Others say that a significant portion of their expenses are allocated for adequate compliance management.

It is also true that some compliance representatives don’t understand the rules themselves. There have been several incidents where regulatory personnel restricted advisors from doing certain things that are clearly legal. Although they demand strict obedience, many compliance departments lack the funding to attract and retain competent personnel. This has not been made easier by recent legislation.

The digital marketplace has introduced a whole new wave of compliance issues pertaining to client communications, advertising and blog posting that advisors must adhere to in order to stay clear of violations. Every posting should probably be submitted to compliance before it can be viewed. All employees must likewise be vigilant of what they post on their own social media profiles, because they should not post anything that their firm would not be comfortable sharing with the public. (For more, see: 5 Must-Read Blogs for Advisors.)

Nailing a Valuation

Advisors who deal with investments or assets that are not publicly traded must have a reliable means of establishing their value. But the valuation methods and appraisal procedures that they use are often rejected by compliance departments that only qualified to view the asset from a regulatory perspective, which may discount the value of the asset below its real worth. Some firms and broker-dealers are developing stringent back office procedures in order to deal with this issue. (For more, see: How to Avoid Risk in Your Practice.)

Cybersecurity and ID Theft

This is probably the single biggest area of concern for most advisors and compliance officers. The digital theft of client assets or personal information is every advisory firm’s worst nightmare. Cybersecurity experts mandate that the security walls used by most advisory firms are still relatively weak and could not prevent a determined attack by expert hackers.

As painful as it may be to their bottom line, advisors need to allocate adequate resources to cybersecurity in order to ensure the safety of client data. Rigorous training procedures for administrative assistants and other staff members should be coupled with thorough client education on security issues such as guardianship of passwords and other login information. These measures can help to foil or at least minimize cyber-attacks and unauthorized access to company portals. (For more, see: 7 Cybersecurity Tips for Advisors.)

Marketing and Advertising

The public investment scandals that have made headlines in the last few decades have left a host of new advertising regulations in their wake, especially in the lending business. Advisors who offer mortgages in any capacity are bound by the advertising rules set forth in the Truth-In-Lending Act. Those who market other financial products or services must also be certain that they are including the required disclaimers and that their ads are ethical and honest. (For related reading, see: Losing a Client Is Not Always Bad.)

Custody of Assets

Making sure that all client assets are accounted for can involve more than cybersecurity. Clients who insist on holding their securities in certificate form may have no recourse against the advisor or firm if those certificates become lost or stolen. Advisors need to set strict policies within their firms on how assets are handled and stored, including checks, cash, security certificates and account paperwork. Clients need to be likewise educated on their responsibility to safeguard these items while they are in their possession.

Foreign Tax Compliance

Although this issue is not as universal as other factors listed here, foreign tax compliance may be the most difficult hurdle to clear for advisors to whom it applies. Wealthy clients who seek to reduce their tax bills will often look to foreign and offshore investments and business holdings. These opportunities can be very lucrative in some cases, but they can also create some very sticky and complex tax issues when they file their returns.

The Foreign Account Tax Compliance Act (FATCA) was passed in 2010 with the intent of clamping down on investors who look for tax-free returns on capital outside our borders. Staying complaint in this area can be monstrously difficult in some instances, as it may involve getting financial data that is submitted from a foreign source whose credibility is hard to verify.

Advisors may also be stuck with the losing proposition of trying to obtain data from a source that is not willing to give it. Those who have clients that own global holdings should expect to spend a fair amount of time dealing with these issues, and need to educate their clients on the possible tax ramifications that they will face.

The Bottom Line

Dealing with compliance issues is one of the inescapable aspects of the financial industry, and following all of the rules that govern every aspect of the advisor’s business is easier said than done. However, advisors who do not devote sufficient attention to this matter can find themselves in hot water with both regulators and their clients.

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