The most troublesome compliance issue for financial advisors

In terms of regulatory compliance, today’s financial advisors need to navigate increasingly complex waters. Those who choose to ignore the rules will find themselves in trouble with FINRA, SEC, DOL and the state government. They may also face penalties or suspension from the standards committee that manages any professional names they may hold.

Even those who follow the rules to the best of their ability can sometimes cross the line. The digital market has also opened up a whole new field, and it has a set of rules that must be strictly followed.

The following are some of the biggest compliance challenges facing consultants in today’s market. (For more information, see: The way consultants should develop.)

Time sucks

The digital revolution has made compliance issues more complex and complicated than ever before, and keeping up with these issues can sometimes feel like a full-time job. Some consultants stated that they spend an average of one day a week dealing with compliance issues. Others stated that most of their expenses are allocated to proper compliance management.

It is also true that some compliance representatives do not understand the rules themselves. There have been several incidents where supervisors restricted consultants from doing certain obviously legal things. Despite strict compliance requirements, many compliance departments lack the funds to attract and retain talent. Recent legislation has not made this easier.

The digital market introduces new compliance issues related to customer communication, advertising, and blog posting, and consultants must comply with these issues to avoid violations. Every post should be submitted to compliance before viewing. All employees must also be vigilant about what they post on their social media profiles, because they should not post any content that the company does not want to share with the public. (For more information, see: 5 must-read blogs for consultants.)

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Determine the valuation

Advisors dealing with undisclosedly traded investments or assets must have a reliable method to determine their value. However, the valuation methods and evaluation procedures they use are often rejected by compliance departments that are only qualified to treat assets from a regulatory perspective, which may discount the value of the asset below its actual value. Some companies and broker-dealers are developing strict background procedures to deal with this problem. (For more information, see: How to avoid risks in practice.)

Cyber ​​security and identity theft

This is probably the area that most consultants and compliance officers are most concerned about. Digital theft of client assets or personal information is the worst nightmare of every consulting company. Network security experts believe that the security walls used by most consulting companies are still relatively weak and cannot prevent resolute attacks by expert hackers.

Although their bottom line may be painful, consultants need to allocate sufficient resources for network security to ensure the safety of customer data. Strict training procedures for administrative assistants and other staff should be combined with comprehensive customer education on security issues such as guardianship of passwords and other login information. These measures can help prevent or at least minimize cyber attacks and unauthorized access to company portals. (For more information, see: 7 cybersecurity tips for consultants.)

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Marketing and advertising

The public investment scandals that have made headlines in the past few decades have been followed by a series of new advertising regulations, especially in the lending business. Consultants who provide mortgage loans in any capacity are subject to the advertising rules set out in the Loan Truth Act. Those who market other financial products or services must also ensure that they include the required disclaimers and that their advertisements are ethical and honest. (For related reading, see: Losing customers is not always a bad thing.)

Asset custody

Ensuring that all customer assets are taken into account may involve more than just cyber security. If these certificates are lost or stolen, clients who insist on holding securities in the form of certificates may not be able to recourse to advisors or companies. Consultants need to develop strict policies on asset handling and storage methods within their company, including checks, cash, securities certificates, and account paperwork. Customers also need to be educated about their responsibility to protect these items while in possession.

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Foreign tax compliance

Although this problem is not as common as the other factors listed here, foreign tax compliance may be the most difficult obstacle for its applicable consultants to remove. Affluent clients seeking to reduce their tax bills often seek foreign and offshore investments and corporate holdings. In some cases, these opportunities can be very profitable, but they can also create some very tricky and complex tax issues when submitting tax returns.

The Foreign Account Tax Compliance Act (FATCA) was passed in 2010 to discourage investors seeking tax-free returns on foreign capital. In some cases, maintaining a complaint in this area can be very difficult, as it may involve obtaining financial data submitted from a foreign source whose credibility is difficult to verify.

Consultants may also insist on failed claims of trying to obtain data from sources that are unwilling to provide it. Those with global holding customers should expect to spend a lot of time dealing with these issues and need to educate their customers about the possible tax consequences they will face.

Bottom line

Dealing with compliance issues is one of the unavoidable aspects of the financial industry, and following all the rules governing all aspects of the consulting business is easier said than done. However, consultants who have not paid enough attention to the matter may find themselves in trouble with regulators and their clients.


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