Most financial advisors retain files because of requirements. But what if you retained them as a source of value? Consider your files part of the asset value of your business. They document the development of your client relationships and implementation and fine-tuning of your systems. They record your intentions and actions as the markets, your clients, and your business evolves. Your files are the biography of your business. This is a story worth saving and developing. It could even form the basis for branding and marketing efforts.

Our goal is not to burden you with excess procedures. Rather, it’s to help you develop a bulletproof practice using a building-block approach. Over time you will add some features and procedures, while eliminating others. You will drive your file organization based upon changes in your business, the regulatory environment, and your experience.

In short, it’s important to think strategically about your files and business practices. They are an important part of the value of your business and an essential risk-management tool, especially regarding the prevention of E&O insurance litigation. Where to start in this process? With the files you store in your desk or on your computer hard drive.

The most convenient place to store some of your important files is your desk drawer (or computer hard drive). Set aside one hour each week to build these files. You will need them for branch reviews by your firm, FINRA, the SEC and the State regulators. You should have these eight sets of files within arm's reach:

1)    Current Written Supervisory Procedures (WSPs) 

  • A hard copy for each year you are with the firm. WSPs change from year to year. You can’t be held accountable for this year’s policy on a transaction that occurred five years ago in a different environment under different policies. The more things change, the more policies get added. If you don’t have any of the previous years, start now.

  • Highlight changes that occur from the previous year. Make notes to self in the margins as acknowledgement of change and how this change impacts your business.

  • Keep these permanent records without any limit to timeline or firm changes. Someone may question your actions five or six years later after significant changes have occurred.

  • Have a copy of each annual attestation proving your review of WSPs.

2)    Compliance/Regulatory Bulletins

  • Maintain changes specific to areas of the business you have an interest in.

  • Make notes in the margins, date, and attach responses to any questions to the bulletins.
  • Attach articles from industry periodicals discussing these changes.

  • Maintain a file of all meetings, seminars and webinars attended. (Include all collateral materials.) Start now and build your files.

3)    Representative/Advisor Agreements

  • Make sure the language is current (no NASD references) and that it is signed and dated by you and a current member of management. The regulators often check this during a review.

  • Highlight language discussing dispute resolution and cost sharing.
  • Highlight “ownership” of client accounts and information. Don’t assume what was said when you were recruited still holds true.

  • Highlight “Termination” language including notices, holdbacks, and filings. You don’t want to be surprised by a long-standing policy to freeze your client accounts, hold back your commissions, and stop paying 12b-1s when you expected these revenues to finance your change.

4)    Errors and Omissions Policy

  • How much is the “Deductible?” Whom is it paid to? Your firm could deduct the amount from your commissions.

  • What is the indemnification limit per occurrence and aggregate? What is the benefit of policy if your clients’ positions are bigger than the indemnification amount and aggregate? Ask several of the firms that went out of business when their E&O policies maxed out.

  • What are the exclusions? Make sure you know whether your business niche is covered.

  • Who is covered (who is the insured)?

  • Is it current (within the last year)?

  • Keep a copy of every year’s updates (this years’ inclusion may be next years’ exclusion).

5)    Insurance Carrier Contracts (GA/MGA/SGA)

  • Special payouts, overrides, and incentives for each of the carriers you represent. Maintain these files indefinitely. Put the most current agreement on top, have a separate folder for each carrier.

  • Have a separate file for insurance continuing education.

6)    Office Lease/Agreements

  • Office equipment, software, lists, lease agreements

  • Expense sharing agreements (i.e: receptionist, assistant, subscriptions, etc.)

7)    Business Plan

  • Have a laminated page that includes your daily activities, and daily, monthly, and annual goals for constant review and adjustment.

  • Record and review your daily, monthly, and quarterly progress and make notes updating your successes and failures. This constant self feedback will provide focus and motivation.

8)    Outside Business Activities (OBA) and Miscellaneous Personal Files

  • Have a file for each outside activity and include a written statement from the firm approving specific activities and limitations.

  • Maintain a copy of your annual attestation form identifying these OBAs. Start today.

  • Expense receipts, special agreements, certifications, etc. You never know when, or by whom your activities will be challenged or why.

The purpose of all of these files is to help keep you current on the latest and most important changes impacting your business. When something occurs to you, it should be quick and easy to refer to these important resources. Although building these files can appear daunting, just taking one item at a time makes it more manageable. You will find that maintaining these files will provide you with the utmost in compliance and legal-defense evidence.

Editor’s note: Watch for further installments in this “Bulletproof Practice” series, provided courtesy of Doug Schriner, president,  FA Risk Management

FA Risk Management, Inc. is a member organization providing education, counseling, and financial support to registered professionals, improving the outcome and reducing the costs of client complaints. To learn more, visit its website.

For information on affordable E&O insurance errors and omissions insurance for low-risk insurance agents, investment advisors, and real estate broker/owners, please visit EOforLess.com. For information on ethical sales practices, please visit the National Ethics Association’s Ethics Center.