RBC advisor Reva Shakkottai sees the strong winds of compliance sweeping over an increasingly regulated advisory landscape.

Regulators have become more concerned with how firms disclose conflicts of interest and manage risk, she says. “In 2016, we’ll see some of the biggest changes to come around in years,” she predicts, echoing industry sentiment. For months, advisors and their managers have been following the Department of Labor’s efforts to establish a fiduciary rule.

While this year promises some major adjustments, Shakkottai represents the type of seasoned advisor who has ridden the wave of regulatory change more than once in her career, and she’s developed an approach that serves her and her practice well.

“I think that the longer someone has worked in this industry, the more cumbersome regulation and compliance can be, because they think back to how it was done in the past,” she says, referring back decades, when advisors were less heavily regulated. For advisors used to a simpler time, new regulations may seem punitive, she says, but her 18 years in the industry have taught her to accept that compliance becomes stricter over time.

“I don’t waste mental energy thinking about all of these new rules and getting upset about them,” says Shakkottai, who is based in Los Angeles as a senior vice president and financial advisor at RBC. The important thing, she notes, is that she has committed herself to acting in the best interests of her clients, supported by the guidance of her compliance group, which she believes is the best overall strategy to being compliant in a world of increasingly complex products and regulation.

With so much attention focused on Labor’s proposed fiduciary rule in the past year, advisory firms say they have sought to promote transparency and eliminate conflicts of interest as they traditionally have — regardless of regulatory requirements.


Ron Long, Wells Fargo Advisors’ director of regulatory affairs and elder client initiatives, says that his firm and others are trying to do that on a large-scale level. “For the most part, we are no longer simply looking at the client from transaction to transaction,” Long says. “It’s more than a purchase here and a purchase there — it’s a relationship.”

In other words, Long and others say, advisors are already protecting clients’ best interests. “Getting the rules of the road from the regulator will just be the final piece in a transition that has been underway for quite a while,” Long says.

Regardless of the DoL’s fiduciary rule, or the SEC’s long-planned version of similar regulation, the concern over conflicts of interest isn’t going away, compliance specialists say.

“Conflict of interest is really what is broadly driving a lot of the regulatory agenda that is going to impact financial advisors,” says Daniel Bender, executive director of Ernst & Young’s financial services advisory group. “And while fiduciary duty might be codified through a law or a rule, conflicts really exist within the engagement with your client, and it happens at the product level, so what firms really need to do is look at what they’re selling and who they’re selling to.”

Those conflicts are already in regulators’ crosshairs, and have been for some time, says Washington, D.C., attorney David Kaleda, who specializes in employee benefits law. The Labor Department has been stepping up its investigations of retirement plans and advisors’ relationships to them for several years, even without the fiduciary rule, he says.

“That’s different from five or 10 years ago, when 80% of investigations would have been at just the plan and the plan-sponsor level, and then a handful of service provider type of investigations,” Kaleda says. Additionally, he has seen much more coordination between the SEC and DoL.

RBC’s Shakkottai says she has been worried about a related trend. “The boundary between sales and advice in the financial industry is becoming blurred, as new platforms and methods of doing business emerge,” she says.

A working knowledge of regulatory issues is essential, Shakkottai says. “It’s our responsibility to become acquainted with the rules,” she says. “We don’t need to be experts in compliance, but as advisors, we need to understand suitability and the risks and rewards of different securities. The onus is on us to determine if there is a simpler way to accomplish the same thing.”

Advisors need to be careful not to take excessive risks, even if clients, motivated by, say, a low-interest environment, ask for it, she says. “The regulators’ policies are punitive; even if you try to help clients and you think you’re doing the right thing, you can still feel the ramifications if you don’t follow the rules,” she says. “You have to be vigilant to protect clients, and you also have to be vigilant to protect your career.”


Shakkottai believes it’s important to go beyond simple compliance. “Following the letter of the law isn’t enough,” she says. “The best advisors go beyond and err on the side of caution and disclose more than you need to. Just because the client can tolerate the risk, it doesn’t mean that they should take excessive risk.”

For Shakkottai’s high-net-worth clientele, the problems of dealing with complex products are always on her mind, and she’s happy to have guidance on compliance in that area.

A notice issued by FINRA in 2012 about heightened supervision of complex products helps to offer that guidance, by recommending caution about securities or strategies with new, complicated or derivative-type features, such as leveraged ETFs, hedge funds or asset-backed securities.

But the guidance has limits, Shakkottai points out, so it’s still up to advisors and firms — in RBC’s case, a risk review committee — to decide how different products should be handled.

At RBC, securities are assigned a complexity level from zero to three; “plain vanilla” stocks and bonds get a zero, while anything getting a three, such as a volatility-index-based product, is banned.

At the beginning of this year, RBC updated its platform to offer trade alerts for complex products, keyed to the suitability for individual investors.

“It’s like a red and a yellow type of alert, so if it’s a Level 2 product, then you’re going to get an alert that the trade must be canceled if the investment objective is preservation of principal or unknown, or if the risk tolerance is minimal or unknown, or if there’s anything that’s unknown,” Shakkottai says.

Complex product flags are keyed to other client characteristics as well, including income, net worth, investment experience and age. “It particularly affects older clients,” Shakkottai notes.

Also affecting older clients is oversight of elder abuse protection. Recently, the SEC investor advocate, Rick Fleming, told Congress in a report that the commission was going to keep close tabs on regulatory efforts to give financial advisors the power to intercede if they believe an elderly client is being exploited or abused.

While Fleming agrees with elder care advocates that advisors should not face “undue restraints” that prevent them from helping abused seniors, he wrote to lawmakers that new authority for broker-dealers and investment advisors to intervene in cases of elder abuse should also have proper limits.

“The challenge is to strike the right balance,” he wrote.

Wells Fargo’s Long predicts additional guidance from FINRA, NASAA and individual states in the coming months. “Challenges such as one-stop reporting for adult protective services, terminating a client relationship and making trading decisions in an account where an owner lacks capacity will all need regulatory input and guidance,” he says.

For advisors who suspect elder abuse, figuring out what to do to help their clients while complying with laws and regulations can be tricky. Long says Wells trains all of its 15,000 employee advisors to consult the company’s centralized elder abuse team. For firms that do not have staff dedicated to the issue, Long recommends they offer training for point people or establish relationships with local social work organizations or schools, to give advisors someone to discuss the situation with.


Advisors who work in smaller firms, without deep compliance resources, have to figure out how to comply just the same as their competitors who work in larger organizations. Whether it’s relying on consultants, offices of supervisor jurisdiction, or compliance officers, the responsibility for compliance ultimately lies with individual advisors.

“You cannot rely on a custodian or broker-dealer to do anything for you,” says advisor John Napolitano. “The advisor is always accountable for being in compliance.”

That accountability extends even to support staff and others who work with advisors, Napolitano, CEO of U.S. Wealth Management in Braintree, Mass., points out.

That means having oversight policies, even background checks, in place for employees or independent contractors who have access to confidential client information. Independent advisors also need to confirm that their vendors are in compliance with data and confidentiality requirements in place in most states, he says.

It’s crucial to keep logs, blotters and other required compliance documentation up to date, as well as records of client conversations. “Do not let things pile up and then get them all together,” Napolitano says. “Regulators will sniff out a lackadaisical attitude about compliance. You must take it seriously, and that’s evidenced by how well you execute on a day-in-and-day-out basis.”

Executing compliance well is much easier if everyone in a firm feels comfortable discussing and asking questions about it, says Marion Halliday, chief compliance officer at Janney Montgomery Scott.


“We train our advisors more than annually; they learn a lot of rules and we really try to help them by giving them the right information at the right time,” Halliday says. But above all, she emphasizes that advisors need to reach out to the compliance team whenever they have a question. “It’s so much better to ask permission than forgiveness — that’s my biggest mantra.” 

At the same time, Janney encourages supervisors to keep in touch with the compliance department to help prevent problems before they arise. “Don’t wait until there’s an unhappy client or situation to call us and see how you might address it,” she says.

Advisor interaction with compliance teams should not focus only on problems, Halliday says. During presentations, her team has been trying to make examples of positive behavior. “We’re really intentionally trying to call out the right stuff when it happens,” she says. “It’s really important for people to know when they get it right, how they got it right and to applaud it.”

That approach can help advisors to view compliance departments as allies rather than as obstacles, but it has to be a two-way street, says Chris Stanley, chief compliance officer for the Loring Ward Group, a broker-dealer firm in San Jose, Calif. “Advisors should understand that compliance isn’t here to make everybody’s life miserable, we’re just here to try to keep us out of regulatory trouble,” he says. “At the same time, we can’t just be the ‘no’ department.”

Advisors should feel comfortable going to compliance officers for discussions even when nothing is wrong, says Stanley, offering up the analogy of seeing a doctor. “Think of it as going for preventive appointments,” he says. “You don’t want to just go to the doctor when you’re sick; you want to do the things ahead of the time to prevent having to go to the doctor at all.”

There needs to be an understanding that everyone in a firm is working toward the same goal, Stanley says. “We’re all trying to help the clients and the business be successful,” he explains. “Even though the compliance department is not a revenue-generating department, they want to prevent the company from losing money, receiving enforcement action or getting bad press, and that’s clearly for the benefit of the company as well.”

That’s the attitude that helps to bring about a so-called culture of compliance, which FINRA said in its most recent priorities letter that it would be focusing on as a major theme for this year.

Stanley says the term “stands for the principle that compliance really can’t be in a silo — it can’t exist separate and apart from the business itself.”

The underlying concept is that while the purpose of the compliance department is to make sure a firm adheres to regulations and company policies, compliance has to be integrated into a corporation across the board.

“That means not only across every department but across every single level of management,” Stanley says.

Janney’s Halliday says she’s encouraged by the emphasis FINRA is placing on culture. Among the questions the authority will ask when they are assessing a firm’s culture: Does the organization proactively seek to identify risk and compliance events? Are supervisors effective role models of firm culture? Are there any subcultures, such as branch offices, trading desks or other departments, that may not conform to the overall corporate culture? She is impressed by the attempts to define and measure firms’ culture of compliance, which in the past, she says, was “like the famous definition of pornography: ‘You know it when you see it.’ Well, with compliance, you know it when you don’t have it, because the organization sucks.”

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