When the CEO of an independent broker-dealer asked one of the advisors at his firm to resign, it wasn’t because the advisor was attempting to offer his client anything unsuitable.
In fact, the advisor had questioned the firm’s decision to deny a product that was “perfectly acceptable,” according to Ed Cofrancesco, CEO of Orlando-based International Assets Advisory. It was a legal offering, but that didn’t matter — the advisor was in it for the commission, Cofrancesco says.
“I didn’t like the smell, the taste, or any of the components of this transaction,” Cofrancesco says. He adds: “The first time I don’t think you’re putting clients first, I don’t want you here.”
Not all planners are similarly motivated.
“The first time I don’t think you’re putting clients first, I don’t want you here,” says Ed Cofrancesco, CEO of IAA.
In recent weeks, the SEC has charged an ex-Wells Fargo advisor for
To prevent such occurrences, state regulators, or firms themselves, place advisors that could be at risk of harming clients on heightened regulation programs.
“Heightened supervision isn’t something that is usually taken lightly, or required lightly,” says Paul Foley, an attorney at Kilpatrick Townsend & Stockton. Advisors might receive this extra oversight if they have outside business activities or have client complaints from annuity sales. Usually the supervision means someone will be looking over the broker’s dealings, or one specific area, he says.
But is heightened supervision working?
At first glance, yes. A September 2018 report by NASAA says 90% of advisors on heightened supervision didn’t have additional complaints, according to a pool of 112 firms examined.
But not all of the firms in the report had policies, or used them, says Frank Borger-Gilligan, who oversaw the coordinated exam report as chair of the broker-dealer section.
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“Some of the firms that did have heightened supervision plans seemed to not be following them or weren’t even aware that they existed,” says Borger-Gilligan. “That’s troubling from a standpoint of whether it’s worth anything at all to even have these levels of heightened supervision.”
About 20% of the firms that did have procedures failed to enforce them, according to the report. About half of the firms with heightened regulation policies didn’t have a path set in place for brokers to exit after a time period of completion.
“These numbers indicate that there is much work to be done both in regard to the new FINRA rules and state requirements regarding supervision,” the study said.
Additionally, more than 36% of the heightened supervision policies did not address criteria for new hires. This has the potential to propose problems: There were 46,658 brokers with serious disclosures on their record in 2015, according to a
“There are some firms that are willing to take on brokers that have faced challenges in the past,” the attorney Foley says. “There are some that are more likely than others.”
But red dots on a BrokerCheck record don’t always tell a conclusive story, according to Cofrancesco.
“We don’t turn anyone away just because they have a regulatory history. We want to know more than that,” says Cofrancesco. He adds: “We believe that there are always extenuating circumstances and two sides to every story, and everybody’s entitled to due process.”
However, IAA has a case-by-case process in place for new advisors to guarantee there will be no missteps. The process begins on the hiring committee, according to Richard Weiss, CCO at IAA (Cofrancesco does not sit on the committee). Compliance and legal team members evaluate brokers with a history of client complaints or regulations, sometimes restricting the advisors from selling certain types of products or mandating frequent reviews and supervision. Follow-up is very important, even after a period of heightened regulation is over, Weiss says.
IAA takes these precautions on top of its standard compliance procedures for all the firm’s advisors.
“Our general procedures usually encompass more, or at least the same as what the states impose,” he says.
Another potential red flag from the report: Less than 35% of individuals responsible for heightened supervision were on-site, according to the report. Hiring out compliance is something frowned upon by regulators, says Foley.
“I’ve seen some actions against outsourced CCO’s that end up being reflective of the fact that they just weren’t there. And because of that, they weren’t able to effectively do their jobs,” Foley says.
However, Weiss says having someone on-site doesn’t make much of a difference, as most of the evaluation is done electronically.
Whether in-house or out, the report shows that heightened supervision works, when used.
And if it isn’t working, the answer is simple, according to Cofrancisco.
“If you have suspicions, just get rid of the person,” he says.
