A Former Ameriprise Financial broker has been kicked out of the industry for excessive and unsuitable trading of senior accounts. FINRA also sanctioned broker Larry M. Boggs for exercising account discretion without written authorization. Case in point: Boggs made 101 transactions on the account of an 82-year-old university professor whose investment objectives were growth and income and who had a moderate risk tolerance. In order to pocket commissions of $34,889, the broker generated client losses of $19,391.

A Washington state investment advisor lived the high life at his clients’ expense, sparking an SEC fraud charge. According to authorities, Ronald A. Fossum, Jr., stole hundreds of thousands of dollars in client funds in order to pay his taxes, jet around the world, and live rent-free. The government claims Fossum persuaded more than 100 investors to invest $20 million in three unregistered funds he owned and controlled. His modus operandi was to offer clients promissory notes paying 8 to 12 percent returns and then invest the proceeds in distressed oil and gas firms, real estate ventures, and derivative instruments. However, instead of making the promised investments, he pocketed his clients’ money in order to buy a home; make mortgage payments; travel to Fiji, Africa, and Mexico; and buy cars. Fossum also used classic Ponzi tactics, using money from new investors to pay the returns of older investors. Fossum and a partner,  Alonzo R. Cahoon, of Morgan, Utah, face individual counts of fraud, multiple violations of the Exchange, Securities, and Advisers Acts, disgorgement of ill-gotten gains, and civil penalties.

A Baton Rouge, Louisiana investment advisor is in hot water for using client funds to pay for his lifestyle, to make other investors whole, and to invest in a high-risk real estate scheme. Ralph Willard Savoie is now looking at one count of wire fraud, according to acting U.S. Attorney Corey Amundson. Authorities say Savoie raised more than $150,000 from investors. But instead of investing their funds in securities, insurance, and in industrial cooling towers, he wrote checks to himself and to his family. He also used client money to pay off prior investors. When one customer suspected something was wrong, Savoie responded by promising to return the man’s money “as long as (the client) did not report the matter to law enforcement.”

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

Three Compliance Developments: Or Why An Advisor’s Work is Never Done!

Financial professionals face a daunting challenge: stay on top of their clients’ needs, track product-portfolio changes, AND stay current on regulations.

Several news items crossed our desks in late 2017 that brought this reality home. One report dealt with FINRA’s proposed ban on expungements. Another promised SEC action on insurance and securities professionals using the term “advisor.” The third announced that the SEC is creating a searchable database of bad brokers.

Clearly, none of these items was blockbuster news. But the three together would demand a block of advisor time and attention. We’re not complaining, mind you. Each of these initiatives appears to be sensible and probably overdue. Yet, they reinforce how compliance-driven this business has become. And it suggests that each new rule brings with it opportunity costs—for product manufacturers, agents and advisors, and regulators themselves.

To help minimize your costs, here’s a brief review of each item, which hopefully will reduce the amount of time you need to spend on it.

FINRA Expungement Ban: No, FINRA isn’t doing away with all expungements . . . just certain ones that are more than a year old.  As reported in Financial Advisor magazine, the action follows a dramatic increase in securities professionals applying to have very old complaints erased from their records.

In theory, requesting an expungement shouldn’t be a problem when a complaint is inaccurate or factually unsupported. The trouble is, defense attorneys have been recruiting advisors in droves to purge their BrokerCheck files of complaints dating back 10 or 15 years, even those without factual errors. Reason: they figure that after such a long period, consumers probably won’t dispute the request, and advisors will get an easy win.

This, in fact, is what typically happens. According to Financial Advisor, arbitrators grant expungements 90 percent of the time. As a result and in response to heavy criticism from the plaintiffs’ bar, FINRA wants to ban expungements on requests made a year or longer after a case closed. This would “ensure that the expungement hearing is held close in time to the underlying customer case, when information . . . is available and in a time frame that would increase the likelihood for the customer to participate” in the hearing.

Our takeaway? That now may be the time to apply for an expungement if you believe an old client complaint is flawed. That’s because FINRA is taking comments on its proposal until February 5, 2018. After an ensuing period of rule making, it will issue a final regulation, after which you may lose the ability to remove old complaints.

If you don’t have old complaints with issues, then ponder the importance of preserving your clean record through ethical and compliant business practices. As with many regulatory developments over the years, the agencies have not only raised the bar in terms of what they consider appropriate conduct, they have made the negative impact of getting sanctioned more severe. So take a look at your business practices to make sure you’re doing everything possible to prevent a FINRA complaint. Once it hits your CRD file, it will likely become much harder to remove.

Use of term “advisor.” The second item relates to an SEC official announcing that the investment-advisor regulator will be taking another look at the titles advisors and brokers used to describe their businesses. According to Financial Advisor, the executive told an industry meeting that the SEC is concerned about securities brokers who call themselves “advisors,” thereby implying they are fiduciaries under the Investment Advisors Act of 1940, when in fact they operate under the less stringent suitability standard.

The SEC also is concerned about brokers holding themselves out as advisors (and thus as fiduciaries) at one point in their client relationships, but then acting as a commissioned salesperson at other times. “If I’m the client, does it really work if I pick up the phone and call you and you’re my fiduciary while we’re talking and when we hang up you’re not my fiduciary any more?” asked Rick Fleming, head of the SEC’s Office of the Investor Advocate, at the TD Ameritrade’s Advocacy Leadership Summit in early November 2017.

However, Fleming stressed that regulating use of the term “advisor” shouldn’t be “worse than the disease” or something that weakens an advisor’s fiduciary role. “What we have to make sure of is that the rule has to be no less stringent than the (Investment Advisors Act of 1940). You have to build in exceptions to accommodate brokers’ business model,” Fleming said. “You have to allow them to sell a limited line of products and proprietary products, and fiduciary duty as written doesn’t allow that.”

This compliance item actually is quite serious, as it may force life insurance agents or securities brokers to change what they call themselves. If this involves reprinting business stationery and revising marketing materials, the headaches and costs involved could be significant. Implication? If you’re planning to enter the industry, think hard about what to call yourself and make sure your title doesn’t encourage a prospect to think you’re something that you’re not.

The regulatory risk is even greater for insurance-licensed producers who not only use the word “advisor,” but also titles such as “financial planner” and “wealth manager.” Not only do they not provide the broad-based financial advice such fee professionals provide, state insurance regulations require them to not mislead consumers about the scope of their work. For example, the NAIC advertising model regulation says that, “No insurance producers may use terms such as ‘financial planner,’ ‘investment advisor,’ ‘financial consultant,’ or ‘financial counseling’ in such a way as to imply that he or she is generally engaged in an advisory business in which compensation is unrelated to sales unless that actually is the case.”

Barred-broker database. The last compliance item relates to the SEC creating a searchable database of barred brokers and advisors. SEC Chairman Jay Clayton announced this at a Practicing Law Institute meeting in early November 2017. “Clearly, there are fraudsters in our marketplace who are seemingly unafraid of, or undeterred by, the risks of being caught,” Carney said. “The SEC can target the underlying conduct of those fraudsters—and we do—but we also can and should arm investors with information that makes it more difficult for them to be defrauded.”

According to a report in Financial Advisor magazine, the SEC plans to create a new website and database that will allow consumers to search for records of individuals the SEC has barred or suspended for violating federal securities law. The agency hopes this will shed light on the activities of barred or suspended brokers or advisors, helping consumers to wisely select a financial professional.

As with FINRA’s proposed expungement ban, the SEC’s banned broker database is another example of regulators raising the bar for financial professionals. In this case, though, it primarily affects bad actors who’ve already been thrown out of the business, making it harder for them to travel to a new jurisdiction after being sanctioned elsewhere. This is a positive development for ethical agents and advisors, who presumably will face less competition from rogue players who are simply out to scam the public.

To read more on ethical business practices, visit the Ethics Center at the National Ethics Association, sponsor of EOforLess. 

Prospecting seminars have been a core financial-services marketing strategy for years, if not decades. And they remain one today despite the emergence of new technologies (the Internet, social media, mobile, etc.) that may reduce the need for such programs.

What’s more, they still exist despite regulatory efforts to dial them back. The last big wave of tightening occurred in the Oughts when annuity marketers aroused regulatory ire for misrepresenting their wares during free-lunch seminars. After regulators clamped down on abuses, seminar regulation remained stable  until 2016, when regulators attending a Securities Industry and Financial Marketing Association conference expressed concerns that pockets of seminar wrongdoing continued to plague the industry.

Recently, the National Association of Insurance Commissioners has again trained its focus on agent seminar conduct, issuing a new Consumer Alert (see pg. 103 of PDF) that explicitly warns the public about what it believes are the dangers of attending an agent-sponsored seminar presentation.

Specifically, the NAIC decided to warn more categories of prospects (from seniors to all consumers) about more types of seminars (from “free-lunch” seminars to all types of seminars with free meals), and about more seminar subjects (from financial products designed to capture savings to any session about financial, retirement, or estate planning.)

The NAIC alert also issues more pointed warnings about seminars, including:

  • Be skeptical about “free meal” educational sessions.
  • Do your homework before attending a seminar or meeting with an agent.
  • Carefully review agent/advisor credentials before attending.
  • Think hard about whether the product or service to be discussed makes sense.
  • Refrain from making a final purchase decision at a seminar.
  • Report a suspected scam to the state insurance department.

Although it’s easy to see why regulators want consumers to be skeptical, what they may not see is how their efforts can place unreasonable sales barriers in front of responsible agents. By creating so much consumer fear, uncertainty, and doubt, they run the risk of shutting seminars down, forcing agents to use other methods to generate prospects.

So what now? As always, the National Ethics Association recommends you provide your prospects only with compliant and ethical seminar content. Here are some specific pointers for making sure this happens:

  • Whether a marketing technique generates a return on investment and whether it’s ethically and legally appropriate are two separate questions. Don’t confuse them. Work hard to execute seminars your prospects will value. But don’t let marketing ROI justify shady seminar marketing or content.
  • Follow all solicitation rules regarding seminar promotion. In other words, fully identify yourself as an insurance agent and/or a financial advisor in your seminar advertising, e-mails, and direct mail. Do not claim to be a university finance instructor just to get people into your seats. This is misrepresentation, period.
  • When you’re at the podium, never say anything that isn’t 100 percent accurate. And make sure all your visuals are true and fully sourced.
  • Consider using pre-packaged seminars from financial publishers and/or FMOs. But vet the content carefully, since you will be on the hook for it.
  • Submit your seminar content—script, visuals, handouts, advertising, etc.—to your registered principal, RIA, or insurance-company compliance officer for approval.
  • Always ask yourself, “Is my seminar based on the principles of fair dealing, good faith, and balance.”
  • When discussing the workings and potential results of an investment or insurance product, be careful not to overstate its safety, liquidity, or anticipated returns.
  • Never hide or misrepresent the identity or credentials of any product sponsors who may have provided financial contributions to your seminar-marketing program.

Finally, and perhaps most importantly, when conducting seminars for lead generation, always view yourself more as an educator than as a salesperson. You want your seminar content to be so useful, actionable, and motivating that attendees will seek you out afterward for a free initial consultation. Let your content do your selling, not your selling!

In short, the best way to respond to regulatory scrutiny of your seminar marketing is to become a better seminar marketer. How? By doing them for the right reason, in the right way, and in full compliance with ethical and legal guidelines. Do all that and we’re confident your seminars—and you—will be just fine!

Building Client Trust

Are you focused on increasing client trust as a business success strategy? If not, you should be, two recent industry reports suggest.

The first, a Vanguard study entitled “Trust and Financial Advice,” strongly confirms the relationship between deeper consumer trust and positive business outcomes for financial professionals. Based on a mix of qualitative and quantitative research with some 4,000 U.S. investors, the research identified the top drivers of advisor trustworthiness.

Interestingly, the Vanguard researchers found that behaviors that strengthened the advisor/client relationship and highlighted an advisor’s professional integrity were more commonly viewed as trust drivers than were an advisor’s functional business strengths (i.e., his or her ability to successfully complete financial transactions or plans).

For example, of the top ten drivers of financial advisor trustworthiness, only one related to functional skills. The remaining nine fell either into the emotional realm (6 drivers), and three dealt with the advisor’s perceived ethical characteristics. Conversely, of the least effective trust drivers, six were functional, one was emotional, and two were ethical.

The point is, if your goal as a financial advisor is to build trust, then it’s important to engage in explicit trust-building behaviors, especially those that deepen trust most efficiently. According to the Vanguard study, which was conducted by Anna Madamba, Ph.D., and Stephen P. Utkus, those 10 drivers include:

  1. Serving as an advocate for your clients—i.e., pursuing their goals as if they are your own.
  2. Acting in your clients’ best interests at all times.
  3. Relating well with your clients; connecting with them on a personal basis.
  4. Deliver a tangible sense of personal relief and heightened security.
  5. Providing products and services that are in tune with their financial goals and risk profiles.
  6. Acting with integrity and morality.
  7. Being generous with your time.
  8. Conveying to clients that their portfolio is important, regardless of its size.
  9. Knowing how to conceive, execute, and reassess client financial plans.
  10. Being compensated in a fair and reasonable matter.

The most important takeaway of the Vanguard study? Trust building isn’t just a feel-good exercise. Rather, it’s a way to generate more positive business outcomes for advisors.  For example:

  • 97 percent of clients with high levels of trust were satisfied with their advisors vs. only 2 percent of those with low trust levels.
  • 94 percent of high-trust clients recommended their advisors to someone else vs. 0 percent for low-trust clients.
  • 70 percent of highly trusting clients were highly likely to give their advisors extra money to invest vs. only 11 percent for clients lacked trust.
  • 70 percent of clients with low levels of trust said they were extremely or somewhat likely to switch financial advisors. However, only 2 percent of high-trust customers said they were extremely or somewhat likely to defect.

If those aren’t strong business reasons to raise your trust-building game, we don’t know what is. In short, if your goal is to increase customer satisfaction, grow referrals, capture additional client funds to invest, and minimize customer defections, then increasing your trust drivers is extremely important, especially those that fall into the emotional or ethical domains.

A second industry report highlights another trust building driver—adhering to fiduciary principles in your client work. According to an article in Financial Advisor magazine, brokerage firms, which are regulated under the so-called suitability standard, are selling for perhaps 1 times revenue. This compares with investment-advisory firms, which operate as fiduciaries, typically selling for 1.5 to 2.5 times revenue.

It’s not hard to see why buyers are willing to pay more for investment-advisory firms. Since they are required to put client interests first, their customers have more faith in them and are more willing to invest additional funds with them, for longer periods of time. Securities broker-dealers, on the other hand, do not benefit from this level of trust. Consequently, their clients are more prone to take their assets to other firms when they have a falling out with their broker. As a result, a broker-dealer’s deposits are much less sticky, making them less valuable to a purchaser.

Any way you look at it, assuming an advisor stays in the business or is planning to sell out, behaving in ways that grow consumer trust makes a tremendous amount of sense. In fact, it could well be the ultimate way to grow your firm or transfer your business to the next generation.