Advisors are at risk

Clients can sue for anything, as long as their lawyers draft their claims with a cause of action supported by material facts. This usually means alleging that you, as the advisor or other individual registrant, were negligent or breached your contractual/professional obligations (e.g., unsuitable investments).

I am not usually retained to defend legitimate complaints from advisors’ clients, as the firm or the advisor’s errors-and-omissions insurer usually cuts a cheque to clients who have legitimate complaints and whose settlement expectations are reasonable. What I am usually asked to defend are the outliers — claims that are usually nonsense or without factual or legal foundation.

You would think that, for such cases, I can ask the court to strike the matter before too much money has been spent on legal fees. The problem is that courts are reluctant to remove any right that someone may have to sue, particularly if there are disputed facts that would require a trial to determine the legitimacy (or lack thereof) of the person’s case and their right to damages. So, even wacky cases usually do not get stopped in their tracks.

Instead, I have to mount a defence based on … yes, wait for it … your detailed notes, supporting that you did indeed fulfil your obligations to your clients. It is only armed with your notes that I can convince the opposing lawyer — hopefully, working on contingency — that their client will not win and they should agree to discontinue the action or risk paying my client’s legal fees.

How to avoid such a nightmare? Interview your prospective clients carefully and follow any insights you have that these clients might be trouble down the road, and do not open accounts for them. If you have opened an account for them already and you know they are trouble, follow the advice in Advisor at Risk, Chapter 7, to fire such clients.

2. Failure to update your outside activities

Only part of your responsibility is fulfilled when you fill out the form for an outside activity (OA). Let’s say you own a company that has a small piece of real estate you plan to develop. When the company expands and obtains financing from family members, who are also clients, you might forget to update the OA, and therefore fail to ask the firm, in advance, to approve this expanded OA.

With each OA, firms must flush out any conflicts of interest. Therefore, all OAs must be pre-approved by the firm before you get in too deep. If a firm finds out afterward that you slid past what you initially reported, they will likely haul you in for an interview. If so, be sure you are forthright with your firm, even if you failed to update them as the OA changed. If you think you can avoid aggravation by being less than forthright about your expanded involvement, you are mistaken, as any misleading answers could lead to termination of your licence.

To be clear, it is the lack of transparency, rather than the failure to update, that usually leads to more serious penalties. If you are terminated for not being honest, your termination form (33-109F1), registered with the regulator, will so indicate and may lead to the regulatory penalty being far worse than it would be for the initial infraction of not updating your OA. It is the difference between a monetary penalty for a breach of your OA reporting and a penalty plus suspension for lying. Getting re-registered after being dishonest can be challenging.

Remember, the regulators have never been more serious about potential, perceived and actual conflicts of interest, so firms need to worry about supervising you.

How to avoid this problem? Either do not engage in OAs, or if you do engage in an OA, overreport to your firm, seeking permission for any anticipated changes. Do this in writing so you can prove that your firm was aware of all changes, big and small, and you have evidence of reporting and obtaining permission.

3. Joint codes — no plan, just a signed form

Joint codes are commonly used, especially to access a higher grid level. Arrangements or processes followed by one or both joint-code partners may not be compliant. Sometimes, the unexpected happens, and one of the registrants on the code cannot work as hard (e.g., they get sick), chooses to work less or unexpectedly passes away. This can lead to considerable aggravation, risk and sometimes expensive litigation.

How to avoid these risks? Discuss with your supervisor/compliance manager how each person on the code will fulfil their respective duties to ensure the division of responsibilities is compliant.

Also, understand how the firm will handle a disagreement between the joint-code partners. Will the firm split the clients in accordance to the percentage ownership of the code? Will the firm favour one joint-code partner over the other? Will the firm let the joint-code partners duke it out?

Further, document the terms of your agreement to ensure you plan for the issues that may arise, such as those briefly described above.

Consider agreeing to revisit the allocation to each partner every few years. Establish a formula to calculate how much each registrant is entitled to, so any changes are objective.

You may have guessed I am not a fan of joint codes, but I know they are here to stay. Be sure you know the risks before you sign a joint-code agreement and take steps to mitigate those risks.

4. No TCP buy-in

I still get calls from dealers concerned about a client’s mental capacity, a client being defrauded, or an inability to locate a client. I tell them to call the trusted contact person (TCP) on file, but (you guessed it!) there isn’t a TCP. That puts the client, advisor and firm at risk.

How to avoid this problem? Understand the reason why a TCP is crucial for all clients, advisors and firms. Understanding these reasons will lead you to be more convincing when you speak to clients about naming a TCP.

Educate yourself about the difference between a TCP and power of attorney (PoA) and how important the TCP is, even when clients have a PoA. For example, if their PoA is their spouse, and they often travel with their spouse, if you are unable to contact one of them, you will be unable to contact both of them. So, how can choosing a spouse cover unforeseen circumstances?

And if the client says they don’t want to appoint a TCP, ask them why. While regulators want you to document why the client declined, I suggest you use this information to convince the clients to choose a TCP. For example, if the client says, “I don’t have anyone who I trust,” your response would be that the TCP is not someone who will be making decisions about the client’s account. The TCP will help the advisor locate or protect the client. Once you appreciate the importance of appointing a TCP, you’ll be better equipped to convince the client.

5. Did I mention notes? Not enough and not meaningful

I know you are tired of hearing this from compliance and from me. But regulatory audits are discovering that registrants are still not getting the message, even though NOTES are the LAW. Compliance is not asking you; they are telling you: Take thorough notes.

The client-focused reforms, NI 31-103, expressly require proof of know-your-client (KYC) information, including specific testing of each of risk tolerance and risk capacity to determine the lower of the two. Also, notes that “paper over” are not enough. For example, “discussed risk, products and I updated their KYCs” does not document what you talked about. Understand that regulators are scheduled to issue a report this spring, and then they will return to firms to ensure that the compliance deficiencies in the report are resolved. If not, enforcement matters with public settlements or contested hearings will follow.

How to avoid the risks of being hauled in by enforcement? Take the time to prepare thorough notes adhering to the 5Cs: correct, complete, current, consistent and contemporaneous (during all calls and meetings). If you are confused about how to ensure the quantity and quality that will fulfil your regulatory and legal obligations, ask your compliance officer for more education and guidance.

All the best for 2025!