CCO Series - Client Suitability

As a fiduciary, an RIA firm is required to make investment decisions in the best interests of its clients. When making decisions regarding the investment options for accounts an RIA firm needs to be able to defend such decisions as being reasonably suitable to the goals and needs of its beneficial owners. Regulators will seek to ensure that decisions made by the firm during the course of providing its services primarily benefit the client and are suitable for a particular account's objectives. Documentation that define a fund's investment objectives or a model portfolio strategy will be compared against the trading history and the decisions made for clients to validate whether or not the firm is making suitable investment decisions when providing its services.

RIA Client Suitability In a Nutshell

Client suitability starts with information about how the RIA firm's investment managers will provide its advisory services and the information about the client or fund that will be relied upon to guide those decisions. For a typical retail RIA situation, this may include your client profile, risk tolerance questionnaire, investment policy statement (IPS), or client notes capturing similar information. For structured investment products this may include the operating agreements, offering documents, and similar information about the funds, parties and entities involved. As these documents are executed, modified, updated or amended the advisor should keep and maintain this additional documentation for their firm's books and records.

Risks related to strategies used by an RIA firm must be disclosed to clients through Form ADV. Specifically in Form ADV Part 2A, the Disclosure Brochure, Item 8 Methods of Analysis, Investment Strategies and Risk of Loss should contain information regarding how the firm's investment management services will be applied to the client's accounts and the potential losses that can occur due to the way the firm will invest the client's assets. It is important for firms to review these disclosures and ensure they accurately reflect the firm's investment methods and cover the risks related to the firm's advisory services.

Confirming Suitability

After collecting a client's information, having them sign an advisory agreement and providing a copy of your ADV and other new client paperwork, suitability becomes a compliance matter for the relationship as you move to digest the information and start making investment decisions for the client's account(s). While your documentation may tell the client to notify your firm of any changes to their profile, goals or objectives, every RIA firm still has an obligation to reach out to the client and confirm the information you have is still accurate and that ultimately to confirm your current understanding of what is suitable for that client.

Confirming suitability can take the shape of having the client complete a new risk questionnaire, sign a new IPS, or to have a meeting with the client where you discuss the management of their account and address suitability matters. Documenting this confirmation is critical to the firm's books and records for compliance purposes on this topic, and can take the form of client notes indicating suitability was discussed and the results of that discussion, or the updated formal documents such as the questionnaire or IPS. For fund managers, this activity means ensuring that the decisions being made for the fund are reasonably accomplishing the objectives of the fund as described in its documentation and ensuring that due diligence documentation is retained for various non-public investments. By having this documentation in your firm's books and records you can demonstrate that your firm has upheld their fiduciary duty when making investment decisions for its various clients.

Through the Regulator's Eyes

Regulators expect RIA firms to maintain documentation on each advisory client to support the investment decisions made for their account(s). During an examination, regulators will typically ask firms to provide their risk questionnaires or similar documents used to obtain information about their clients, and will also request information about trades in client accounts, and will reconcile the two to ensure that decisions made for clients are suitable and that there is a rational basis between the documentation, analysis, and investments. Further, regulators will review the information in your firm's disclosure brochure to reconcile to the types of investments to ensure that the strategies and risks are properly and fully disclosed to clients.

CCO Best Practices

Conduct a random sampling review of client files to verify that suitability is appropriately documented. Run a comparison between the client's trading history and the suitability documented to ensure investment decisions are in line with investment objectives. Validate that the last outreach attempt to each client is within one year. Additionally, review your firm’s client intake/onboarding and ongoing review process to ensure you are capturing adequate information to make, or continue to make, appropriate investment decisions in client accounts and provide advice that is in the client’s best interest.

The AdvisorAssist CCO Series is a collection of blog posts that cover each of the elements of your RIA's compliance program. Each post will provide an overview of one compliance topic, including our insights on how regulators view each topic as well as some practical steps to help Chief Compliance Officers address this topic. As always, we would welcome your comments and thoughts.

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Who's Who in the Eyes of RIA Regulators

Years ago, as a partner in a small advisory firm, I was asked to review and update our compliance program. This firm was a bit more complex than most, in that we had a pretty expansive set of outside shareholders, contractors and advisory board members in place. When I got to the topic of reviewing "roles" of each of these individuals I got a bit stumped. Who exactly were our "access persons"? Supervised persons?

Fortunately in most wealth management business models, determining "who's who" in your advisory firm is fairly simple ..assuming you understand the SEC's definitions of each role.

Here is an overview of each defined role that advisors must identify and monitor.

Chief Compliance Officer (CCO)

This is an individual that is responsible for administering and enforcing your firm’s compliance program. The CCO may delegate responsibilities to appropriate designees as long as he/she remains primarily responsible for compliance oversight and administration.

The CCO must be empowered with full authority to develop and enforce your firm’s compliance policies and procedures. The CCO and designees must be competent and knowledgeable regarding the Investment Advisers Act of 1940 as well as securities laws that apply to your investment process.

Key Takeaways: Be able to demonstrate that your CCO is knowledgeable of securities regulations and has sufficient authority to enforce and affect change.

Investment Adviser Representative (IAR)

Any person that (for compensation) makes any recommendations or delivers advice to clients; manages client portfolios; determines which recommendation or advice regarding securities should be given; solicits, offers, or negotiates for the sale of or sells investment advisory services, or supervises people that perform any of these activities.

Key Takeaways: Essentially anyone that provides (or sells) advice for your firm will be considered an IAR. With the exception of administrative duties (like answering the phone, taking messages, or setting up meetings) everyone that has client contact should be an appropriately-licensed IAR of your firm. This includes solicitors.

Supervised Person

A supervised person is any partner, officer, director (or other person occupying similar status or performing similar functions), or employee of an investment adviser, or another person who provides investment advice on behalf of the investment adviser.  This definition essentially defines those individuals that are considered to be under the supervision and control of your firm.

Key Takeaways: Essentially includes your entire team including external solicitors. Your Written Supervisory Procedures apply to all Supervised Persons.

Access Person

Access Persons are anyone that has access to nonpublic information regarding client transactions or who is involved in making securities recommendations to your clients or has access to recommendations that are non-public.

Key Takeaways: Non-public information includes client information, trading activity, and model portfolios. Access persons are subject to your firm's Code of Ethics and Personal Trading Policies.

CCOs should maintain an up-to-date list of people that fall under each of these categories. By doing so, they will be in a solid position to ensure (and document) that policies are applied to appropriate people that fall under their firm's compliance program.

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CCO Series - Business Continuity and Succession Planning

Each of us tends to either ignore or underestimate the possibility of disasters occurring in our futures. This has been proven time and again by cognitive science research and often referred to as "normalcy bias."
In our experience, RIA firms place high importance on business continuity planning, yet often (particularly with smaller firms), either postpone or abbreviate the process of creating, testing and maintaining their BCP document.
These tendencies leave them exposed to the risk of disruptions in their ongoing responsibilities to clients.

Advisor Business Continuity Planning (BCP) In a Nutshell

We employ this framework to help RIA firms implement their business continuity planning:

• Business Analysis. Identify the critical business processes that you must perform daily, as well as those that become critical in a typical 10-day period. Think through the possible and likely scenarios that could result in a business disruption (i.e. power outages, weather, systems failures in your office building). Take an inventory of all technologies and external partners that you rely on to run your business.
• Plan Design. Define the scope of your plan. Ensure that the plan covers disaster recovery as well as succession planning (see the “key-man risk section” below). Your BCP must also contain:
  • firm policy/plan expectations, contingency scenarios, critical business functions (Day 1 vs. Day 10),
  • critical business systems and how to access them,
  • contact information for employees, vendors, and partners, alternate work location(s),
  • back-up and restoration of critical information,
  • protection of client information, and
  • protocols for testing, updates, and revisions.
• Implementation. With the buy-in and support of your leadership, socialize and review the plan with your team and provide training (and cross-training) for key activities, data access, and data protection. Ensure that your plan is accessible to everyone from a remote location (e.g. current copy at home, copy on separate secure server or Intranet).
• Testing. Perform a "live" test at least annually by following the BCP as written. Document gaps in the plan and document deviations from the plan. Require full participation (at the same time!) and test all critical functions and systems, including, operations, vendors, and communications.
• Maintenance. Update your plan on a real-time basis for process changes, technology enhancements, regulatory changes, and contact information. Deliver and train your team on changes.

Consider the “Key Person” Risk

It is critical that RIAs integrate succession into their business continuity planning. The unexpected death, incapacitation or departure of key advisory staff is an additional risk that may affect an RIA’s ability to protect client interests and fulfill their fiduciary responsibility, and it is up to advisors to take reasonable steps now to ensure their clients are relatively protected from this risk.
To protect against this risk, RIA’s should adopt management practices that mitigate their reliance on any one individual or to allow for process continuity during planned absences like vacations. These include:

• Establishing and documenting defined roles and responsibilities
• Cross-training of operational processes and controls
• Knowledge sharing (so that more than one person is familiar with the firm’s investment process and clients)

Technology will play a central role here. Active (and universal) use of a CRM will ensure that client information is centrally stored and easily accessible. Likewise, an internal website may be used to store the firm’s operations manual, which documents all critical processes and procedures. In the absence of a formal operations manual, RIAs may post a set of documents that detail their investment process, workflows, and operational procedures.
In addition to these operational controls, RIAs should consider establishing a legal agreement that governs their firm in the event of the death or incapacity of an owner.

Single-Owner RIA

Single-Owner RIAs may wish to establish a “continuity agreement.” A continuity agreement is a legal contract that appoints an “alternate” registered investment adviser to assume client responsibilities in the event of the death or incapacity of an RIA. If this were to occur, the “alternate” adviser would be responsible for offering to assume the advisory role (the client has the ability, of course, to decline). The extent of the alternate adviser’s responsibilities can vary. They may be limited to interim oversight (to give clients the opportunity to seek a new RIA) or the alternate RIA may be charged with overseeing a sale of the business or acquire the advisory business themselves.

Multiple-Owner RIA

Multiple-Owner RIAs may wish to establish a “buy-sell agreement.” Buy-sell agreements establish guidelines for an orderly internal sale of the advisory firm to the other owners. Typically these owners are employees of the firm and should be familiar with the firm’s clients and investment process.

Through the Regulator's Eyes

The SEC has identified business continuity and succession planning as a requirement for RIA firms arising from their fiduciary duty. (See SEC Release IA 2204) While they require policies and procedures to address business continuity, they do not mandate specific requirements for the BCP, other than it must address the procedures to meet the fiduciary responsibility to protect client interests from being at risk as a result of an advisor’s inability to operate. Certain states have adopted formal BCP requirements for state-registered RIA firms. Given this, ensure that you take the time to check your state regulatory requirements regarding your BCP.
Regardless of the implicit or explicit requirements, all RIAs should have a formal BCP in place to demonstrate to regulators and clients that they have planned for the undisrupted performance of their fiduciary duty.

CCO Best Practices

• Plan for the 99.5% and not the 0.5%.
• Ensure buy-in from senior management and owners.
• Test your plan at least annually by selecting one day to conduct business from an alternate location(s).
• Update your plan with new/changing contact information for staff and external partners.
• Ensure that the protection of client information is a priority during business disruptions.
• Leverage your BCP obligations to use as a foundation for a documented operating plan (Operating Manual) for your business.
• Begin to integrate succession planning into business continuity planning preparation.
• Consider establishing legal agreements that govern the firm to mitigate against the “Key Person" risk.

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Don't forget about your annual renewal fees!

We have officially entered the annual renewal season for 2016! As we prepare for the holidays, don't forget that you must submit payment for your firm's annual renewal fees. Failure to do so by the stated deadline will result in the termination of your RIA's registration.  You should have already received an email from FINRA in regards to your Preliminary Statement.  Your preparations should be underway now as the deadline for payments is December 18, 2015.  What do you need to do?  


Complete a thorough review of your current registration status.  Here are a few questions to ask yourself:

• Based on your client growth, have you exceeded the de minimus threshold in additional state(s)?  
• Are you currently registered in any states where you are now under the de minimus threshold?
• Are your IARs properly registered?  Key Reminder: For SEC firms, some states do not require IAR registration if there is no place of business or under the de minimus threshold. 
• Once you have confirmed your applicable registrations, make sure to validate the fees calculated by FINRA and transfer funds into your Renewal Account (IARD system). 

If you are not an AdvisorAssist Compliance Client and are seeking assistance with the Annual Renewal process, please contact us at:  sales@advisorassist.com.

For more information, please see the IARD Renewal Program page:  http://www.iard.com/renewals.asp

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Guest Post from Susan Weiner, CFA: Legal Dangers for Financial Bloggers

Legal dangers for financial bloggers: Two misconceptions, three resources, one suggestion By Susan Weiner, CFA

No financial blogger wants to get in trouble with the law, become liable for financial damages, or tarnish his or her reputation. You’ve probably thought about compliance with laws governing advisors registered with the SEC, FINRA, or other regulators. But what about copyright laws?

I believe a significant number of advisor-bloggers are guilty of copyright violations when they share information written by others. I have come across several well-meaning advisors who mistakenly believed they acted within the law when they copied all or part of other people’s blog posts. In fact, they had broken the law and could have been on the hook for financial penalties.

To help you cope, I’ve written this article sharing two common misconceptions, three resources, and one suggestion to keep you on the right side of the law and make everybody happy.

Misconception #1: If you credit and link, that’s enough

Most advisors and other financial bloggers know you shouldn’t copy someone else’s work and pass it off as your own. However, I’ve seen advisors who think it’s okay to copy an entire newspaper article on their blogs as long as they name the author and publication details in addition to linking online to the original article.

This is not correct, as you’ll realize when you check out my resource section below.

Misconception #2: If you only copy XXX words, it’s okay

There is no word-count rule that protects you from charges of copyright infringement. If you use the “heart” of the work, you’re in trouble, as explained in the “Amount and Substantiality of Portion Used” section of the University of Minnesota University Libraries’ excellent web pages on copyright.

In fact, even short phrases may be protected by copyright, according to “Copyright Protection for Short Phrases” in the Copyright and Fair Use section of the Stanford University Libraries website.

How can you share content without violating copyright? Check out the resources in the next section.

Resources for “fair use” of copyrighted material

Lawyers use the term “fair use” to describe the legal use of copyrighted materials. Here are two websites and a printable checklist that will help you assess whether the amount of another author’s text that you reproduce in your blog post is acceptable. There are no short, easy guidelines that fit all situations.

1. “Understanding Fair Use” is a good overview of the issues, presented by the University of Minnesota’s University Libraries.
2. “Fair Use,” a book chapter on this topic, is available on the Stanford University Libraries website.
3. “Thinking Through Fair Use,” a printable check list from the U. of Minn. University library, will help you think through the issues for specific materials.

Suggestion to ensure “fair use”

When in doubt, ask the author for permission to reproduce the content on your blog. Don’t assume they’ll say “yes.” However, you may score points with writers who are anxious to spread their message. If the writer says, “No,” at least you know to tread carefully in how you use the author’s content.

By the way, I don’t oppose bloggers summarizing or adding their own spin to other people’s content. But please don’t violate copyright by exceeding what is considered “fair use.”

Susan Weiner, CFA, is the author of Financial Blogging: How to Write Powerful Posts That Attract Clients, which is tailored to financial planners, wealth managers, investment managers, and the marketing and communications staff that supports them. Read her blog or follow her on Twitter, Google+ or the Investment Writing Facebook page.

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Top 10 AdvisorAssist Blog Posts from 2012

Here's some weekend reading: Top ten most popular AdvisorAssist Blog Posts from 2012.

Happy new year and thank you for following us!

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RIA Key Person Risk: What are the options?

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Webinar: Enter Into Social Media Marketing With Confidence

Webinar: Enter Into Social Media Marketing With Confidence

Date: September 21, 2012

Slides and Replay:

http://advisors4advisors.com/webinars/details/216-enter-into-social-media-marketing-with-confidence


The social media pool is open. While advisors should not be afraid to test the water, they must be prepared before diving in.
Chris Winn of AdvisorAssist will guide you through the current regulatory landscape and strategies for starting out and managing your social media presence.

At this session, you’ll learn the latest about:

• SEC, state and FINRA social media rules
• Formulating a social media strategy
• Best practices in implementing a social media policy
• Technology for efficiency
• Specific areas of interest to regulators
• Common mistakes to avoid

Speaker Chris Winn is founder and managing principal AdvisorAssist, a management consulting firm serving advisors, and he has over 19 years of experience in regulatory compliance for RIAs, reps, and B/Ds.

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