broker-dealer-compliant

As a financial professional, you understand why it’s important to maintain a clean compliance record. Without one, it’s hard to grow your business from among today’s skeptical prospects. But do you also know why it’s equally crucial for all of your intermediary firms to be as committed to compliance as you are? Unless your broker-dealer, registered investment advisor (RIA), and insurance field marketing organization (FMO) are as squeaky-clean as you, you may face regulatory trouble down the road.

Here’s the problem. When your intermediary firm has a checkered compliance history, they automatically become the focus of regulator attention. And when regulators become suspicious of your broker-dealer, RIA, or FMO, they tend to also become suspicious of you. This has real consequences for your ability to do business, says Jon Henschen, in a recent ThinkAdvisor.com article.

  • First, intermediaries who don’t comply with regulations or that hire agents or advisors with the same disregard spark extra regulatory sweeps and audits. These will distract their management teams and make it harder for advisors with clean backgrounds to get their business on the books and their compensation processed.
  • Second, the more regulatory scrutiny a firm receives, the more money it will spend on legal and compliance services. These costs will ultimately come out of advisor compensation—out of your wallet or pocketbook.
  • Third, when regulators find evidence of wrongdoing, they often will push for the removal of the responsible parties. If they have long tenure, their leaving will weaken the company’s institutional memory and bench strength. This may not bode well for its ability to compete in the future.
  • Fourth and finally, every time a broker-dealer, RIA, or FMO gets into regulatory hot water, it will generate negative publicity that lives forever on the Internet. As the firm’s reputation weakens, so will yours because you are tied to the firm. It’s hard enough to generate new clients without giving prospects an additional reason to question your integrity.

Solution? Do thorough research on any intermediary firm before joining it. If you’re considering a broker-dealer, conduct a thorough BrokerCheck review to uncover the scope of disclosure events among its registered representatives. Simply go to Brokercheck.finra.org, click on the individual tab, then type in the broker-dealer’s name where indicated. The result will be pages showing all the firm’s registered reps and indicating those with disclosure events. If you see “yes” in the disclosures field, click on “more details” to learn about the person’s infractions.

Now, this process can be unwieldy because there’s no way to retrieve a summary report showing the percentage of reps at a firm with disciplinary issues. Best you can do is scan the individual reports and then click on the “Yes” to see how and why an individual representative got into trouble. However, if you scan the broker-dealer’s registered representative summaries long enough, you’ll be able to see if the firm has dubious ethics.

According to Jim Eccleston of Eccleston Law, as you’re doing this, watch for disclosures that indicate:

  • Serious negligence or financial abuse of clients, including churning, borrowing from a client, forging documents, or selling unapproved products from an outside organization (selling away).
  • A pattern of paying fines for violating industry rules.
  • Personal bankruptcy or other credit-related problems that suggest the representative is financially stressed or has exercised poor financial judgment.
  • Repeated firings from prior broker-dealers and/or working for many different firms in various states over a short period of time.

It’s also important to evaluate a broker dealer’s own compliance record, not just those of its representatives. To do that, return to the main BrokerCheck page, click on the “Firm” tab, and then enter the firm name or CRD# where indicated. Hitting “search” will return the firm’s disclosure history (if any), where you’ll get a sense of its own adherence to industry regulations and business ethics.

You can do the same individual and firm-level analysis for investment advisor representatives and their RIA firms by visiting the SEC’s Investment Adviser Public Disclosure website. For insurance FMOs, your sleuthing will be much trickier because there is no single government agency or database to check. Since FMOs often operate in multiple state jurisdictions, it can be tough to get a handle on how many of their agents have run afoul of the law . . . or whether the firm itself has. Best advice: let Google be your friend.

Hopefully, researching FINRA, SEC, and state insurance compliance records will reveal whether signing with an intermediary firm is risky. If so, doing business anyway might result in you paying more for your E&O insurance. On that basis alone, it’s wise not only to do your due diligence before joining a broker-dealer, RIA, or insurance FMO, but also to take what you find seriously. No point paying more than necessary for your E&O insurance.


For information on affordable E&O 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.