A Financial Advisor's Guide To Compliance (2024)

The financial industry is heavily regulated and the SEC is not messing around when it comes to regulatory compliance. We're talking about a record-breaking $6.4 billion in fines for violations in FY22. 

And the worst part? 

It's not just a matter of dollars and cents; it's about the far-reaching consequences that can affect every aspect of your enterprise:

Meetings are missed, deadlines slip by unnoticed, and teams are left scrambling to pick up the pieces. The company's bottom line is hit hard with falling revenue and decreasing productivity, while customers grow wary of a business that can't seem to get its act together. And if that's not enough, there's the added cost of trying to “fix the mess,” a task that can seem insurmountable as the problem continues to worsen. 

To reiterate:

When it comes to regulatory noncompliance in the investment and financial advisory industry, the numbers speak for themselves. A staggering $14.82 million was the recently reported average cost, and that's not a figure your advisory practice can afford to ignore.

In this article, you will gain the knowledge and resources necessary to successfully navigate regulatory changes, safeguard your business practices, and maintain compliance.

Regulatory Changes: Your Chance To Shine Or Fall Behind - Choose Wisely

When you stay current with regulations, you'll hit multiple birds with one stone. 

Now, you might be thinking, "Wait, how can regulatory changes be an opportunity? Isn't it just more rules and paperwork to deal with?" 

But here's the thing: regulatory changes often come as a response to changes in the market and the needs of consumers. They are the way we protect our investors and make sure our financial advisors always have their clients' backs. It's that simple. Take, for example, the Investment Advisers Act of 1940, also known as the “Advisers Act,” which is “the last in a series of federal statutes intended to eliminate abuses in the securities industry that Congress believed contributed to the stock market crash of 1929 and the depression of the 1930s.” (SEC)

So, if you can stay ahead of the curve and implement these changes effectively, you'll not only be complying with the regulations, but you'll also be providing better service to your clients. 

Additionally, playing by the rules isn't just the right thing to do, it also pays off big time with better ratings, an enhanced reputation, and a heightened sense of social responsibility.

But, if you fall behind and fail to adapt to these changes, you risk being left behind by your competitors. Your clients may start to question your ability to provide the best service and may even start to look for a new advisor who is up-to-date on the latest regulations.

Ignorance Isn't Bliss: Must-know Regulations For Financial Advisors

Regulatory policies are not up for debate. In the US, the Advisers Act of 1940 or comparable state statutes regulates money managers, investment consultants, and financial planners in the US as "investment advisers" The Advisers Act defines the following:

• Who is an “Investment Adviser” as well as exclusions from the definition?

• Which Investment Advisers Must Register Under the Advisers Act? Including exceptions and prohibitions from registration.

• Who must register under the Advisers Act?

• How an investment adviser can register under the Advisers Act;

• Requirements applicable to a registered investment adviser: fiduciary duties to clients; substantive prohibitions and requirements; contractual requirements; recordkeeping requirements; and administrative oversight by the SEC.

Some other recent significant regulatory updates that every financial advisor should know include:

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 

The SECURE 2.0 Act 2022: The latest legislation represents a significant step forward from the SECURE Act of 1999, as it introduces several crucial modifications to retirement planning. 

Among these changes, is the decision to raise the minimum distribution age to 73 in 2023 and 75 in 2033. Not only does it facilitate younger generations to save while simultaneously paying off student debts, but it also streamlines the process of transferring accounts between employers and provides a means to save for emergencies through retirement accounts. Furthermore, it includes provisions for long-term, part-time employees to participate in 401(k) plans.

Regulation Best Interest (Reg BI)

This regulation, which went into effect on June 30, 2020, “establishes a new standard of conduct for broker-dealers when making a recommendation of any securities transaction or investment strategy (including account recommendations) to a retail customer.” In other words, it requires broker-dealers to act in the best interest of their clients when making investment recommendations. 

 At the compliance date, Reg BI is laser-focused on these key areas:

• Rollovers and withdrawals from 401(k) and other plans. When suggesting roll-overs, transfers, and withdrawals from “one type of account to another, or to take withdrawals from an account” to retail investors, investment advisors must approach with caution and thoughtfulness.

• Complex or risky products. Firms should carefully review to ensure that investments in “complex or risky products, including significantly leveraged products that rely on derivatives strategies to enhance returns, or those that focus on investments in less liquid and more volatile markets” are in the investor’s best interest.

• SPACs and Other Structured Investment Vehicles. Advisors need to consider any risks - including conflicts of interest - when recommending investments like SPACs to retail investors. 

• Covid-related investments. During the height of the pandemic, before recommending any of the numerous Covid-related investments that sprang up, the advisor must analyze the potential risks, rewards, and costs and only suggest options that align with the retail investor’s goals and risk tolerance.

Form CRS

As part of Reg BI, the SEC also introduced “Form CRS,” which stands for Client or Customer Relationship Summary. This form provides a concise summary of a financial advisor's services, fees, and any conflicts of interest.

How To Keep Up With Changes In Financial Advisory Regulations

Don't Let Regulatory Changes Slip Past You

The first step in keeping up with regulatory changes is to stay informed. This may sound obvious, but you'd be surprised how easy it is to miss important updates amid a busy schedule. 

What are your options?

• Sign up for regulatory newsletters and alerts: Regulatory agencies such as the SEC, FINRA, and state regulatory agencies offer newsletters and other resources that can help you stay informed of new regulatory changes. 

• Sign up to the Taylor Method (TM): Aside from being one of the best sales training for investment and financial services professionals, members of the Taylor Method also receive ongoing support and insights from industry experts. 

Some more:

• Attend industry conferences and events

• Join industry associations and groups

• Follow industry experts on social media

• Read industry publications and blogs

Craft A Bulletproof Compliance Plan

Think you can wing it on a moment's notice? Think again. In today's regulatory environment, having a solid compliance plan is essential. This means having clear policies and procedures in place that are designed to ensure that you and your team are always operating per industry regulations.

The name of the game is to be Proactive, not Reactive.

Instead of waiting for changes to happen and then scrambling to adjust, you should be constantly evaluating your business practices and looking for ways to improve compliance.

Here are some steps you can take to develop a compliance plan:

• Review existing policies and procedures: For practices with existing compliance policies, conduct regular audits and risk assessments to identify potential issues before they become problems. Your goal is to identify any areas that need to be updated or changed to bring them into compliance.

• Develop new policies and procedures: If necessary, develop new policies and procedures to ensure that your practice is compliant with new regulatory changes.

• Train your team on these policies and procedures. See how in the next section.

• Implement compliance monitoring and reporting: To ensure your practice remains compliant with regulations and requirements, it's crucial to have a robust plan in place for ongoing monitoring and reporting. This can involve conducting regular compliance audits to identify areas of potential risk and reporting any necessary information to the relevant regulatory agencies.

• Review and update the compliance plan regularly.

So if you haven't already, start working on your compliance plan today. It may not be the most exciting part of your business, but it's certainly one of the most important.

Boost Your Team's Compliance IQ With Training

You need to understand this:

Your team members are the first line of defense when it comes to protecting your business from costly compliance missteps. 

With that understanding, ensure they're equipped with the knowledge and skills they need to operate at the highest level. Do this:

• Provide regular training: Provide regular training on compliance and regulatory issues to ensure that your team understands the latest regulatory changes. This could be in the form of  informative webinars and immersive workshops to personalized one-on-one coaching,

• Encourage a culture of compliance: Reward compliance efforts and promote compliance as a core value of your practice.

• Provide resources: These are tools that will help them stay up-to-date on the latest regulatory developments.  For example, external resources, such as regulatory agency newsletters, webinars, and other resources.

Take it to the next level…

• Use real-life scenarios to illustrate compliance requirements.

• Encourage questions and feedback.

• Incorporate compliance training into onboarding processes.

Embrace Technology To Maximize Your Efficiency

While we want to commend you for believing in your capabilities, the truth is that there are limits to what you can do on your own. This is where technology comes in - by leveraging the right tools and software, you can streamline your compliance efforts and maximize your efficiency.

One example of this is compliance management software. They are designed to help you track and manage your compliance efforts, from client onboarding to risk management, compliance reporting and compliance monitoring, and beyond. By automating many of these processes, you can save time and reduce the risk of errors or oversights.

Don't forget about communication tools. 

By using tools like video conferencing, chat, or collaboration software, you can stay connected with your team members and clients even when you're not in the same location. This can help you stay on top of compliance issues and address them promptly.

Our candid advice: Take a leap and test out innovative tools for regulatory compliance to determine what's a match made in heaven for you and your business.

Stay Organized

How much do you hate it when you can't find that one important document you need right when you need it? We've all been there, and it's not a fun experience. 

Here are some tips for staying organized:

• Create a compliance calendar: Create a calendar of regulatory deadlines and compliance activities to ensure that you stay on track.

• Use checklists: Use checklists to ensure that you don't miss any compliance activities or deadlines.

• Keep records up to date: Regularly review and update client records, policies, and procedures to ensure they are accurate and up to date. This can help you identify any potential compliance issues before they become problems.

• Regularly review your compliance plan: Make sure to regularly review and update your compliance plan to ensure it reflects the latest regulatory changes and best practices.

No Need To Struggle Solo, Call In The Professionals!

Let's be honest, juggling too many roles can quickly become a recipe for exhaustion and frustration - especially when it comes to a mundane endeavor like tracking financial advisory regulations. 

If that's you, consider calling in the calvary:

Hire a compliance consultant or work with a compliance firm. Just ensure you do your due diligence before signing off on a contract.

Final Word: Navigating Regulations Is Tough, Supercharge Your Practice's Success

Navigating changes in regulatory policies is just one more reason why the financial advisory market is an unforgiven landscape. And it is not going to change. You need to adapt - and give your practice the best possible help it needs to succeed!

In addition to compliance, there is one other guaranteed path to take to boost your practice's success. 

A sales process that turns the status quo on its head. 

The best part is that this sales process can complement your compliance efforts and help you build stronger relationships with your clients.

The Taylor Method is a sales training program specifically designed for investment and financial services professionals that will teach you how to “develop the mindset, process, and language to build a million-dollar practice.”

As several case studies have proven, it is a proven method that has helped countless financial advisors escape the rat race and achieve financial freedom for less effort and time. For a limited time, enrollment is open - book a spot today.