In today’s heightened regulatory environment, risk reduction is often a firm’s top priority—making advisors more vulnerable than ever before.
Knowledge is power—particularly in a world where compliance scrutiny has ramped up, and firms prioritize risk reduction over revenue creation. It’s more critical than ever to be aware of how vulnerable your business – your life’s work – is to potential and unseen landmines.
Expense account violations, improper use of personal cell phones, and unapproved content in email correspondence—are some of the reasons advisors are either placed on heightened supervision or, in some cases, terminated in today’s compliance-driven, risk-elimination environment. As a result, advisors often worry they might inadvertently cross a line that could damage their careers and livelihoods.
Understanding how internal investigations and terminations play out can help advisors protect their businesses and land on their feet. These insights are culled from years of experience working with advisors that have been investigated and/or terminated—and successfully made it to the other side.
Let’s start with internal investigations.
- “What are they? And, will I know if I am being investigated?”
Internal investigations are exactly what they sound like, a review undertaken by your firm’s legal and compliance team to gather the facts surrounding a potential infraction. These can include everything from sales practice violations to a breach of internal administrative policies, email, and social media guidelines, or HR issues. Typically, an advisor is informed that they are being investigated and is often asked for cooperation in answering questions and providing documentation related to the infraction.
- “Is it possible to switch firms while I am under internal investigation?”
While it is possible to switch firms while under investigation, the reality is that not all firms will consider an advisor with an open investigation. For those that will, there will be an extensive review of the situation by the firm’s legal and compliance team. For a firm to move forward, it typically must determine that the infraction doesn’t violate its own internal policies and that there is no ongoing regulatory investigation resulting from the incident. In no instance should an advisor try to hide that they are under investigation: The information will most certainly come out, destroying credibility. In fact, the pre-hire paperwork at most firms includes a question regarding internal investigations. At the end of the day, moving while under investigation isn’t a slam dunk and will, in most cases, still result in a mark on an advisor’s U5. That said, if the alternative is almost certainly a termination, it may be the better choice.
- “What if I am afraid that the internal investigation could result in my termination? Should I leave pre-emptively?”
That’s a tough one since the reason for the investigation will have a significant impact on whether a new firm will consider bringing you on board, as noted above. Pre-emptively hiring an attorney to help determine how at-risk you are for termination and beginning due diligence with a trusted recruiter to understand how hirable you are will help to make the decision. Ideally, advisors should always have a solid “Plan B” in place. Understanding how the landscape has evolved and knowing the other firms or models that are the best fit for your business is always beneficial. And in times of stress, it’s particularly important, allowing an advisor to respond from a position of strength.
With the increased frequency of advisor terminations, even top advisors who once felt their production levels shielded them, are watching firms cut ties with their peers. Why? Enhanced FINRA scrutiny has resulted in firms prioritizing risk management over revenue. So given the change in climate, it’s essential for advisors to have the answers to some basic questions.
- “What types of things are advisors being terminated for?”
Of course, terminations for sales practice violations, like unauthorized trading, churning, and unsuitability are expected. But we’re also seeing pink slips issued for expense account violations, unapproved email correspondence or social media posts, undisclosed outside business activities, and failure to complete mandatory internal training. In the past, these types of violations often resulted in heightened supervision if they were first-time offenses and the advisor had a clean compliance record. Unfortunately, today they are more likely to result in a termination, as firms don’t want to take on the responsibility and risk that monitoring the situation could entail.
- “What can I do to protect myself?”
It may seem trite to say, but “follow the rules” serves as your best protection. Likewise, don’t think an exception will be made because you run a big business or have a clean compliance record. Always disclose anything that even feels close to a grey area before getting involved and get written “pre-approval” from your compliance team to avoid any confusion if something gets flagged in the future. And always have a “Plan B” ready: Periodically pick your head up and evaluate the landscape of opportunities for your business to determine if there are other firms or independent models that could be a great landing spot.
- “If I am terminated, what can I do to get rehired?”
Immediately hire an attorney and call a good recruiter. The attorney will help to prepare a written explanation of the facts surrounding the termination and will also try to impact the U5 language posted by the former firm since both will be critical in determining hireability. The recruiter will help you choose the firms to consider based on the reason for termination and the hiring environment. After that, it’s important to always be transparent about what happened, acknowledge the mistakes made, and ensure that it won’t happen again. An advisor destroys credibility by blaming the situation on others and by not being forthcoming with all the facts. Although getting through a termination is incredibly stressful, sometimes there is a happy ending. For example, an ex-UBS advisor blindsided by a termination found a successful next act in the independent space, plus greater happiness and, ultimately, exoneration!
- “What types of firms should I consider?”
Casting a wide net is advisable since, in most cases, the decision to hire will be made only after the U5 language is posted, which can be as long as 30 days following the termination date. For advisors that run great businesses and have clean U4s, there will be a lot of interest. But unfortunately, interest doesn’t necessarily translate into offers. Although local branch managers and business development reps always want to onboard great businesses, the decision is out of their control and will be made by the firm’s legal and compliance team following broad corporate guidelines. That means in addition to talking with the big brand name firms, advisors must also consider smaller firms and independent platforms where there may be greater flexibility to look at an advisor’s particular situation and history on a more personalized basis.
Although most advisors may never be investigated or terminated, it’s essential to understand that in today’s heightened regulatory environment, risk reduction is often a firm’s top priority. This heightened focus on risk reduction impacts how firms approach all aspects of the business—from choosing investment solutions to growing documentation requirements to the tight reins on social media usage. In the view of one top advisor and former Merrill ACTM chair, Kelly Milligan, “Firms have shifted from managing risk to trying to eliminate it.”
Recognizing this makes having a Plan B at the ready to help you regain control quickly should you inadvertently cross a line. And it’s critical to revisit that plan frequently because in the ever-expanding industry landscape, there are always new ways to live your best business life in the wealth management world.
