Protecting Your Practice E-Book

Katherine Vessenes

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Bloomberg Professional
• Sprache: Englisch

Seitenzahl: 506

Veröffentlichungsjahr: 2010

Beschreibung

This is the benchmark book for building client relationships, growing a practice, and avoiding litigation--written in association with the world's leading organization for financial services professionals. Audience: Broker-dealers and their home-office personnel, registered reps, accountants, tax advisers, insurance agents and insurance companies, wire houses, fee and commission planners, attorneys, trust officers, estate planners, and development officers in planned-giving departments. As investors gravitate toward no-load mutual funds and do-it-yourself investing through discount brokers, professionals are being squeezed by competition, consumer wariness, and tighter enforcement by the SEC, NASD, and state securities regulators. This book addresses these challenges, helping anyone offering financial advice to be more competitive, build client loyalty, and avoid the liabilites that come with managing someone's money in today's complex investment environment. How to offer better service, comply with key regulations, maintain vital records with a minimum of paperwork, and protect a business from malpractice claims.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

Acknowledgements

Introduction

KNOWING THE ALPHABET

SECTION ONE - DEFINING WHO’S WHO

CHAPTER 1 - THE FINANCIAL PLANNER

SEC Definition

State Definitions

Industry Definitions

CHAPTER 2 - THE INVESTMENT ADVISER

Firm and Individual Registration

Definition

Exclusions and Exemptions

State Registration

Failure to Register

State and SEC Registration

CHAPTER 3 - THE FIDUCIARY

Definition of Fiduciary

Obvious and Not-So-Obvious Fiduciaries

Reluctant Fiduciaries

Captive Fiduciaries

Fee-Only Fiduciaries

Fiduciary Responsibilities

CHAPTER 4 - OTHER FINANCIAL PROFESSIONALS

Wire Houses, Broker-Dealers, and Brokers

Insurance Personnel

Accountants

Tax Specialists, Estate Planners, and Others

Investment Advisers and Financial Analysts

SECTION TWO - PLAYING BY THE RULES

CHAPTER 5 - THE COMPETENCY FACTOR

National Standards Update

Establishment of Competency

CHAPTER 6 - INSURANCE REGULATIONS

Prohibited Practices

Required Disclosures

The Life Insurance Design Questionnaire

CHAPTER 7 - BROKER-DEALER REGULATIONS

Selling Away

Notice to Members 94-44

Supervision

RIA Affiliation

Other Issues

CHAPTER 8 - INVESTMENT ADVISER REGULATIONS

Advertising Rules

Disclosure Requirements

Required Record Keeping

Advisory Contract

Other Regulations

New Regulations

CHAPTER 9 - OTHER LAWS

Advertising Rules

Internet Communications

Living Trust Regulations

The Uniform Prudent Investor Act

Telemarketing Law Violations

Sales Incentives

SECTION THREE - GOING ON THE OFFENSE

CHAPTER 10 - PRODUCT AND SERVICE PROVIDERS

Back Office Checklist

Supervisor Checklist

RIA Affiliation

Product Due Diligence

CHAPTER 11 - THE FIRST CLIENT MEETING

Client Expectations

Meeting Agenda

Data Gathering

Disclosure Forms

The Difficult Client

CHAPTER 12 - SUBSEQUENT CLIENT MEETINGS

Engagement Letter

Investment Policy Statement

Checklists

CHAPTER 13 - THE IMPORTANCE OF FEEDBACK

Follow-Up Correspondence

German WonderCar Tactic

Client Satisfaction Survey

CHAPTER 14 - THE UNHAPPY CLIENT

Identification of the Difficult Client

Difficult Client Graduation

Warning Signals

Client Conciliation

Nine-Step Conciliation Process

Complaint Strategies

SECTION FOUR - BUILDING A GOOD DEFENSE

CHAPTER 15 - WHEN CLIENTS

Motivations

Negligence Theories

Other Causes of Action

Taped Calls and “Securities Bankruptcy”

CHAPTER 16 - COMMON COMPLAINTS

Investment Suitability

Failure to Disclose

CHAPTER 17 - ERRORS AND OMISSIONS COVERAGE

Carrier Considerations

Policy Considerations

Coverage Considerations

Terms and Provisions

Exclusions

CHAPTER 18 - MEDIATION

Mediation Benefits

Mediation Steps

CHAPTER 19 - ARBITRATION

Notice of Arbitration

NASD Arbitration Process

Advantages and Disadvantages

Concerns about Arbitration

Current Status

Arbitration Clauses

CHAPTER 20 - SEC AND STATE AUDITS

Background Information

Types of Exams

Red Flag Areas

Survival Techniques

Responses and Outcomes

RESOURCE A

RESOURCE B

APPENDIX A - CODES OF ETHICS

APPENDIX B - DOCUMENTS AND SAMPLE FORMS

NOTES

PERMISSIONS CREDITS

INDEX

About Bloomberg

KATHERINE VESSENES’S superb new book will show you how to build client relationships, grow your practice, and avoid lawsuits in today’s increasingly competitive and litigious environment.

Protecting Your Practice provides forms and checklists, case studies, practical strategies, action items, and insights into the critical issues that affect financial services professionals. Katherine Vessenes spells out ways to enhance client relationships, comply with regulations, organize record keeping, and protect your business from malpractice claims.

Written in association with one of the world’s largest and oldest organizations for financial services professionals, Protecting Your Practice is essential information for registered investment advisers, broker-dealers, registered representatives, accountants, tax advisers, insurance agents, wire houses, commission and fee planners, attorneys, trust officers, estate planners, and development officers in planned giving.

Praise forProtecting Your Practice by Katherine Vessenesin cooperation with the IAFP

“Katherine Vessenes is almost unique in the compliance community with her focus on client relationships and building a practice.”

BOB VERES PublisherInside Information

“A tremendous resource for the serious financial professional . . . A valuable tool for establishing preventive measures to help avoid customer complaints and litigation.”

DENNIS KAMINSKI Senior Vice President and CAOMutual Service Corporation

“A great book to help professionals properly position themselves in the marketplace.”

JOHN MCGOVERN Formerly Compliance DirectorNathan & Lewis Securities

“Must-reading for every financial professional who wants to stay in business.”

ALEXANDRA ARMSTRONG, CFP Former ChairmanArmstrong, Welch & MacIntyre, Inc.

“Katherine Vessenes has traveled these roads as a planner and a lawyer. Follow the map and you won’t get lost.”

VICTOR J. PRYLES Former Senior Vice PresidentInvestors Financial Group

“There are two types of financial planners: those who read this book and those who are committed to learning the hard and painful way.”

MYRA SALZERThe Wealth Conservancy, Inc.

“Well-organized and practical.”

JAN WALSHWashington State Librarian

“This book is a practical guide to a subject of paramount importance to registered reps, broker-dealers and managers. Katherine Vessenes has clearly communicated technical compliance information in a format that is easy to apply to your practice. We have ordered a copy for each of our registered reps.”

LAWRENCE J. RYBKA, JD, CFP PresidentValMark Securities

“The definitive guide on the subject.”

STEWART H. WELCH, III, CFP,CHFC, AEPThe Welch Group

“Katherine Vessenes underscores the most important element of successful financial planning: When you keep your clients happy, you keep your clients. Whether you’ve been a financial planner for years or are new to the profession, you’ll find Protecting Your Practice an essential addition to your professional library.”

THOMAS W. JOHNSON Former Executive EditorFinancial Planning

“A voice of authority and knowledge that comes from years of dealing with these issues.”

ROBERT CLARK Editor in ChiefInvestment Advisor

“Katherine Vessenes . . . is ahead of the pack in providing clear and concise text, real-life situations, and action items that can be incorporated into the successful planner’s practice. . . . A must-read for serious financial professionals.”

JEFFREY H. RATTINER, CPA, CFP President and CEOJR Financial Group, Inc.

“Protecting Your Practice is a continuation of Katherine Vessenes’s valuable contribution to the financial planning profession. We don’t like to think about it but we must take appropriate steps to ensure the continuation of our practice for our own protection and that of our existing clients. This book tells us how to do it.”

LINDA S. LUBITZ, CFP Managing Director, East BayMosaic Financial Partners, Inc.

“Its no-nonsense approach . . . provides practical solutions for avoiding the various legal and regulatory pitfalls of the financial services industry.”

RICK YOUNG Former Director of ComplianceFSC Securities Corporation

“An excellent resource for compliance officers, financial planning practitioners, and investment advisers. Katherine Vessenes’s suggestions show how compliance can and should become an integral part of your day-to-day activities—without causing ‘sales prevention.’”

NANCY JOHNSON JONES, CFP President and FounderStrategic Compliance Concepts

... and praise for her previous book, The Compliance and Liability Handbook for Financial Planners and Financial Service Professionals by Katherine Vessenes in cooperation with the IAFP

“We require all our representatives to read Katherine’s practical and insightful book. Our group works with high-producing independent agents who need to know specifically what they must do to protect their business. Her marketing ideas on how to grow your business are invaluable. Combined with her legal viewpoint on how to avoid litigation, every detail is worthwhile.”

LAWRENCE J. RYBKA, JD, CFP CEO and PresidentValMark Securities

Also available from Bloomberg Press

Virtual-Office Tools for a High-Margin Practice:How Client-Centered Financial Advisers Can Cut Paperwork,Overhead, and Wasted Hoursby David J. Drucker and Joel P. Bruckenstein

The New Fiduciary Standard: The 27 Prudent InvestmentPractices for Financial Advisers, Trustees, and Plan Sponsorsby Tim Hatton, CFP, CIMA, AIF In cooperation with the Foundation for Fiduciary Studies

Deena Katz on Practice Management:For Financial Advisers, Planners, and Wealth Managersby Deena B. Katz

Deena Katz’s Tools and Templates for Your Practice:For Financial Advisers, Planners, and Wealth Managersby Deena B. Katz

Building a High-End Financial Services Practice: ProvenTechniques for Planners, Wealth Managers, and Other Advisersby Cliff Oberlin and Jill Powers

In Search of the Perfect Model: The Distinctive BusinessStrategies of Leading Financial Plannersby Mary Rowland

How to Value, Buy, or Sell a Financial-Advisory Practice:A Manual on Mergers, Acquisitions, and Transition Planningby Mark C. Tibergien and Owen Dahl

Practice Made Perfect: The Discipline of Business Managementfor Financial Advisersby Mark C. Tibergien and Rebecca Pomering

A complete list of our titles is available at www.bloomberg.com/books

ATTENTION CORPORATIONS

THIS BOOK IS AVAILABLE for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets, or phone [phone].

© 1997 by Katherine Vessenes, JD, CFP. All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY, 10022, or send an e-mail to [email protected].

BLOOMBERG, BLOOMBERG LEGAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG PRESS, BLOOMBERG PROFESSIONAL, BLOOMBERG RADIO, BLOOMBERG TELEVISION, BLOOMBERG TERMINAL and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg L.P. All rights reserved.EVISION, BLOOMBERG TERMINAL and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg L.P. All rights reserved.

This publication contains the author’s opinions and is designed to provide accurate and authoritative information. It is sold with the understanding that the author, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the author, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments or recommendations made by the reader.

Vessenes, Katherine

Includes index.

ISBN 1-57660-053-X (alk. paper)

1. Financial planners- - Legal status, laws, etc.- - United States--Popular works. 2. Financial planners- - Malpractice- - United States--Popular works. I. Title. II. Series.

KF2921.Z9V473 1997

332.6’068 - - dc21 97-25544

CIP

Permissions credits on page 472.

This book isdedicated to theCreator of Truthand Integrity

—K . V .

Acknowledgments

THIS BOOK WOULD NOT have been possible without the help of many generous people. I am especially grateful to Laurie Grover, Todd Wilson, Carey J. Gifford, Robin L. Bellinson, Dale E. Brown, Barbara Diez, Jared Kieling, Patricia A. Taylor, Priscilla Treadwell, and my review committee: Ed Morrow, John McGovern, Dennis Kaminski, Nancy Johnson, John Simmers, Janet McCallen, and Rick Young. The following people kindly allowed us to include copies of their forms and documents: Arnie Abens, Alexandra Armstrong, J. Floyd Swilley, Nancy Johnson, Ed Morrow, Fred Haiker, Richard Young, Linda Lubitz, Norman Boone, and Lawrence J. Rybka.

Without the unselfish support of my husband, Peter, and my children, Peter, Ted, and Sarah, I could never have completed this manuscript. To all of you, my most heartfelt thanks.

INTRODUCTION

PROTECTING YOUR PRACTICE

NOTHING HIDES SIN like a bull market.

When stock prices are soaring, the last thing on most clients’ minds is regulation violations. In a prolonged bear market, however, even your favorite clients may be phoning you from their attorneys’ office.

When I first started in the business, my mentor taught me to do certain things that were actually felonies. He was not trying to make me a criminal. He was just handing on to me the same overzealous sales practices that had made him a lot of money. In the years since then, the field has become so competitive and complex that even experienced financial professionals will find new things in this book to improve their practice and keep them out of trouble.

The first step in building a successful practice is knowing what business you are in. Forty years ago, proprietors of drive-in restaurants thought they were in the hamburger business. McDonald’s Corp. founder Ray Kroc understood something his competition did not: he was really in the speed and clean-restroom business. That knowledge made him a billionaire.

You need to know what kind of business you are in. What is really motivating clients to seek your advice?

Believe it or not, we are in the peace-of-mind business. Whenever I lecture on choosing an adviser, an investment, or even a broker-dealer, I counsel the audience to first look at the character of the people at the top. If people of good character are running the operation, they will work hard to save even the worst deal. On the other hand, leaders with poor character at the helm can destroy even the best deal.

Character is critical. Trusting a financial adviser to behave ethically when no one is looking is the single most important factor on a consumer’s mind. Clients are begging for someone they can trust. We can build that good faith and reliance by showing them that our integrity is beyond reproach.

I believe in doing what is right by the client. I believe this not just to appease regulators and avoid lawsuits but also because it builds business.

This book is about the “how” of doing the right thing.

K . V .

KNOWING THEALPHABET

THE FINANCIAL SERVICES industry has more than its fair share of acronyms. To make this book as user-friendly as possible, it was decided to include all widely used acronyms in this front material. These acronyms are presented below in alphabetical order. Whenever you see an acronym in the text and are not sure what it stands for or means,just refer to this listing for a brief definition.

In general, acronyms specific to one subject matter and appearing in only one chapter are not included here. Thus, ADR or Alternative Dispute Resolution is not listed below as it is described solely in Chapter 18. However, both ADR and Alternative Dispute Resolution appear as entries in the Index.

AICPA (AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS) Based in New York City, AICPA has 328,000 members throughout the country. Although only 1,650 accountants have earned its PFS designation, the Personal Financial Planning Membership Section of AICPA has 7,000 members. 1

CFA (CHARTERED FINANCIAL ANALYST) This designation, awarded by the Association for Investment Management and Research, is described in Chapter 4.

CFP (CERTIFIED FINANCIAL PLANNER) The CFP and Certified Financial Planner designations are two separate federally registered service marks, which are for the use of individuals who have completed the requirements established by the CFP Board. Approximately 31,500 people are currently licensed to use the CFP mark.2 This is discussed in Chapter 5.

CFP BOARD (CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC.) This is a private, not-for-profit, professional regulatory organization which sets standards for CFP credentials, including education, examination, work experience, and ethics. 3 These standards are discussed in Chapter 5.

ChFC (CHARTERED FINANCIAL CONSULTANT) This educational designation, described in Chapter 5, is granted by The American College, Bryn Mawr, Pennsylvania. The American College was founded to serve the life insurance industry by the American Society of CLU and ChFC, a national association for life insurance and financial services professionals also headquartered in Bryn Mawr. Approximately 15,300 members of the society have been awarded the ChFC designation. 4

CLU (CHARTERED LIFE UNDERWRITER) This educational designation, described in Chapter 5, is granted by The American College, Bryn Mawr, Pennsylvania. The American College was founded to serve the life insurance industry by the American Society of CLU and ChFC, a national association for life insurance and financial services professionals also headquartered in Bryn Mawr. Most of the 34,000 members of the society hold the CLU designation. 5

CPA (CERTIFIED PUBLIC ACCOUNTANT) This designation, awarded to accountants after a prescribed course of study and experience, is described in Chapter 4.

E&O (ERRORS AND OMISSIONS COVERAGE) Chapter 17 is devoted to this form of liability insurance.

ERISA (EMPLOYER RETIREMENT INCOME SECURITY ACT OF 1974) Regulation of pension plans is included within the scope of this Act.

IAFP (INTERNATIONAL ASSOCIATION FOR FINANCIAL PLANNING) This is a professional membership association dedicated to advancing the financial planning process. Founded in 1969, IAFP is the oldest and largest nonprofit organization of its type in the world. The IAFP represents more than 16,500 individuals and institutions in all 50 states and abroad who are committed to furthering the financial planning process as the foundation for smart decision making. Its members, primarily financial advisers, are from all backgrounds and disciplines.

IARFC (INTERNATIONAL ASSOCIATION OF REGISTERED FINANCIAL CONSULTANTS) Headquartered in Chesterfield, Missouri, this professional association has more than 1,000 members. It provides practice management support services, hosts educational conferences, and awards the RFC designation to those who have earned it. 6

ICFP (INSTITUTE OF CERTIFIED FINANCIAL PLANNERS) Headquartered in Denver, Colorado, this is a membership association for the Certified Financial Planner professionals who have qualified for the license prerequisites set by the CFP Board of Standards, Inc., the professional regulatory body also located in Denver. ICFP has 11,000 members.

IPS (INVESTMENT POLICY STATEMENT) This written document verifies a client’s investment philosophy, financial goals, and the specific strategies for attaining these goals.

NAIC (NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS) Created by state insurance regulators in 1871 to address the need to coordinate regulation of multistate insurers, NAIC membership includes commissioners from all states, the District of Columbia, and the four U.S. territories. NAIC helps regulators fulfill their obligation of protecting the interests of insurance consumers and provides a forum for the development of uniform policy.

NALU (NATIONAL ASSOCIATION OF LIFE UNDERWRITERS) This is a federation of approximately 950 local life underwriters associations affiliated with 50 state associations; together, the local and state associations make up the national organization. There are 120,000 sales professionals in life and health insurance and other financial fields that belong to the local associations. To fulfill its mission, NALU develops programs in communications, education, ethical conduct, government relations and advocacy, member associations, public relations, and community service.

NAPFA (NATIONAL ASSOCIATION OF PERSONAL FINANCIAL ADVISORS) With more than 575 members and affiliates, NAPFA is the largest association for fee-only financial planners. It is headquartered in Buffalo Grove, Illinois, and seeks to improve and promote comprehensive fee-only financial planning as well as to increase public awareness of the financial planning field and fee-only financial planners. The association has three membership categories: member, provisional member, and sustaining member. NAPFA affiliates are fee-only professionals in financial services and related industries who are not otherwise candidates for any category of NAPFA membership. Compensation based on commissions, rebates, bonuses, finder’s fees, or other types of compensation based on financial planning recommendations cannot be accepted by members. 7

NASAA (NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION) The oldest international organization devoted to investor protection, NASAA is the voice of the 50 state securities agencies responsible for grass-roots investor protection and efficient capital formation. Its standing committees are organized into four sections, one of which is in the area of broker-dealer and investment adviser regulation. Uniform national model codes and guidelines developed and adopted by NASAA are made available for adoption by individual states.

NASD (NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.) Subject to SEC oversight, NASD is the nation’s largest self-regulatory organization and has responsibility for the Nasdaq Stock Market as well as the vast over-the-counter securities market and the many products traded in it. Its membership includes virtually every broker-dealer that does a securities business with the public.

P&C (PROPERTY AND CASUALTY INSURANCE) This form of insurance includes homeowner and automobile policies. As discussed in Chapter 12, it is rarely reviewed by financial planners.

PFS (PERSONAL FINANCIAL SPECIALIST) This is a professional designation that has been created by AICPA for CPAs who want to specialize in financial planning. It is described in Chapter 5.

RFC (REGISTERED FINANCIAL CONSULTANT) This designation, described in Chapter 5, is awarded by IARFC.

RIA (REGISTERED INVESTMENT ADVISER) A financial services industry person or firm who gives investment advice about securities and is registered with the SEC and/or state securities administrator(s).

RR (REGISTERED REPRESENTATIVE) A broker or sales representative of a broker-dealer.

RR/RIA Registered Representatives who are also Registered Investment Advisers.

SEC (U.S. SECURITIES AND EXCHANGE COMMISSION) This is an independent, nonpartisan, quasi-judicial regulatory agency with responsibility for administering federal securities laws. The SEC also regulates firms engaged in the purchase or sale of securities, people who provide investment advice, and investment companies.

SIA (SECURITIES INDUSTRY ASSOCIATION) This is a trade association representing the business interests of more than 700 member securities firms throughout North America. SIA represents members’ interests in Washington and serves as a liaison between the industry, the regulators, and the exchanges; offers a broad range of services, enabling its members to operate more effectively; and serves as a medium through which member ideas, experience, and information can be exchanged.

UPIA (THE UNIFORM PRUDENT INVESTOR ACT) This model act updated trust investment law and trustees’ responsibilities in recognition of the many changes that have occurred in modern investment practice.

SECTION ONE

DEFINING WHO’S WHO

STIMATES INDICATE that there are hundreds of thousands of you managing many billions of dollars of assets. Yet, you exist in a legal limbo. Your professional duties can subject you to lawsuits in one state but not in another. Statutes and organizations vary widely in the way they do or do not distinguish among financial planners, financial advisers, and investment advisers. You can tell clients you are an insurance agent and yet, in some states, legally be held responsible as a financial planner. The first step, then, in protecting your practice is to determine what exactly you do and what you are legally entitled or required to call yourself.

CHAPTER1

THE FINANCIAL PLANNER

FINANCIAL PLANNERS and advisers find themselves on their own, trying to figure out how to describe their services accurately and how to play fair. Many follow the lead of their professional organizations in simply describing a financial planner as a person whose business is personal financial planning. While federal and state regulations are often excruciatingly more specific, they may not agree.

Not only is it hard to define who is a financial planner, it is difficult to determine what laws and rules apply to the profession.

Unfortunately, there is no significant body of law to use as guidelines regarding standards for financial planners and advisers. Because the financial planning profession and the statutes regarding the profession are so new, few cases have been tried under these laws; fewer still have been appealed and therefore reported as authority.

To protect your practice, you need to be aware of the nuances various legal entities and professional organizations incorporate in their definitions of what constitutes financial planning activities and who qualifies as a financial planner. In general, the various definitions are anchored in one of two basic precepts: “holding out” (i.e., title used) or “in the business” (i.e., services provided). As explained below, the federal government, the various state governments, and your own professional organizations are not consistent in which approach they use.