Better safe than sorry: Tales of compliance

Published February 21, 2017 1:19 PM

Updated February 22, 2017 4:30 PM

1 Min Read

Helpful consultants? Kafkaesque bureaucrats?

No matter how advisers see compliance departments and officials, the authority they wield gets everyone’s attention. We asked planners for their best tales of compliance gone right — or wrong.

Is “mutual fund” a controversial term?

About three years ago, Jon Ten Haagen, founder and principal at the Ten Haagen Financial Group in Huntington, New York, appeared on a television program to discuss investing. The reporter asked him what he would tell a client who didn’t have any money. “Ifsomeone has a job, she or he should be able to put away $12.50 a week. That’s $50 a month, which is the minimum to do an automatic ACH investment in a mutual fund,” Ten Haagen responded.

He said nothing about comparing mutual funds, annuities, or other investments. But his response still caught the attention of FINRA.

The regulator told Ten Haagen he could not use a video of the program on his website because he used the words 'mutual fund.'

“FINRA said that if I wanted them to review it, they would, but it would cost me $125 for their review of the first 10 pages,” Ten Haagen says. He agreed to the compromise and FINRA did end up approving his single-page script.

A year later, he was on another television program, heard the same question, and answered it the same way. After Ten Haagen wrote an article about mutual funds and why they're a good investment option for most individuals, FINRA told him a review was necessary if he wanted to post it and would cost $125.

“I did and I was approved. ‘Mutual fund’ is a generic term, so why the financial hit each time? There has to be a better way for FINRA to make money,” he says.

Jon Ten Haagen
Founder and principal
Ten Haagen Financial Group
Huntington, New York

Diligent note-taking amid red flags

Arnie Cabiles, managing director at Achievable Wealth in Vallejo, California, tried to save a client from a scammer.

His client called him to say that her grandson was in prison and needed $2,000 from her IRA account to pay an attorney.

“That was a red flag for me, and I told her so,” Cabiles said. “Even her husband warned her.”

Despite his adviser's pleas, the client couldn’t be dissuaded.

“I literally pleaded with her not to take the money and to take the time to contact family. I would assume that having a family member in jail would be a big thing,
Cabiles says. "Unfortunately, I couldn't talk her back from the ledge. And yes, I kept notes on everything to protect myself and the firm in case of arbitration.”

It did end up being a scam. “The grandson was safe and sound, and the client was sorry she hadn’t listened to me and thanked me for caring enough to be concerned,” Cabiles says.

Arnie Cabiles
Managing director
Achievable Wealth
Vallejo, California

A suspicious-looking investment

When Keith Schnelle was a securities representative in 2001, he was considering buying a personal investment property in Costa Rica. The investment looked suspicious to his compliance department.

Schnelle's compliance apartment told him he had to make a choice.

“They told me that I could buy a property there or continue to have them hold my licenses here, but not both. Even though buying investment property in Costa Rica isn’t illegal under U.S. law, the compliance department saw me as a potential money launderer under SEC and FINRA guidelines,” he says.

Schnelle then decided to begin working with clients looking to diversify offshore — and do it according to U.S. tax and legal requirements. If it’s that controversial and complex, he reasoned, then high-net-worth investors will need help from someone who knows the rules when it comes to navigating offshore diversification.

“That’s true diversification, not simply owning real estate on six corners of the same city and thinking one is diversified,” he says.

Keith Schnelle
Founder
Solutia Global
Austin, Texas

A sketchy idea and an empty complaint file

Jane King, president of Fairfield Financial Advisors in Wellesley, Massachusetts, tells two stories about compliance.

In the first, the son of one of her clients had just graduated from Harvard Business School with a sketchy sounding plan. "He said he wanted to buy stocks when the market in Europe is open and then sell them on the U.S. market after the European market closes," King recalls. She said no. The firm lost the account and the son later went to prison for insider trading.

King’s firm was also audited recently. “They said, ‘You don’t have a complaint file,’ and we said, ‘We’ve never had any complaints,’” King says. The auditors insisted that the firm still needed a complaint file, so now it has one. “There’s nothing in it,” she says.

Jane King
President
Fairfield Financial Advisors
Wellesley, Massachusetts

No harm, no foul

A state regulator came to the aid of Brian Hanks, an adviser at Practice Financial Group in Boise, Idaho.

“The state regulator came to check me out in my first year of business, and I had forgotten to have a client sign an investment advisory agreement,” Hanks says. “The regulator said ‘look, you have to do these and you’ve got thirty days to get them in place.’ No harm, no foul.”

Brian Hanks
Financial adviser
Practice Financial Group
Boise, Idaho

Preventing a college compliance disaster

Plenty of people claim to be college application specialists, but not all of them are qualified.

Marguerita Cheng, CEO of Blue Ocean Global Wealth in Potomac, Maryland, prevented a compliance disaster for a couple with two children. They have 529 plans and cash-value insurance.

“A college planner told these clients to cash out their 529 plan to purchase insurance that is guaranteed to earn 2 percent,” Cheng says.

The couple would have paid taxes and penalties for cashing out the 529 plans. Increasing their taxable income could affect financial aid awards. They also would have traded a liquid investment for an illiquid one, realized lower returns and paid more for insurance.

“Then the specialist proceeded to tell the clients that six months of cash reserves was too much and they should fund the policies with this money,” Cheng says. “Thank goodness they reached out to me. I told them that if they have too much money in cash reserves, they don't need a product. They can pay off their car loans. They can also add more to their existing policies that return a guaranteed 4.5% and are out of surrender.”

Marguerita M. Cheng
CEO
Blue Ocean Global Wealth
Potomac, Maryland

More of a consultant than an auditor?

Nate Byers, founder of JBC Wealth Advisors in Madison, Wisconsin, was surprised when an auditor was much more helpful than he expected

“Our state audit went surprisingly smoothly,” he says. “[The auditor] said that she found no discrepancies. She also answered questions I had for her with unexpected willingness. Overall I felt like she was more a consultant for me than what I would expect from an auditor.”

Nate Byers
Founder
JBC Wealth Advisors
Madison, Wisconsin

Too much of an expert?

Back in his brokerage days, Robert Schmansky, founder of Clear Financial Advisors in Detroit and Ann Arbor, Michigan, spent a half hour trying to understand why he couldn’t market his undergraduate degree.

The compliance department, he says, thought his degree “sounded too much like I was an expert in financial planning.” The degree, he says, was a bachelor’s in human resource management from Ohio State's school of human ecology —a CFP program. “I never understood,” Schmansky says.

Robert Schmansky
Founder
Clear Financial Advisors
Detroit and Ann Arbor, Michigan

An anticlimactic audit

No news was good news for Keith Singer, president of Singer Wealth Management in Boca Raton and Miami, Florida. “I’ve been audited,” he said. “They just showed up and asked for a bunch of documents, then said that they’d be back in the new year.”

But the auditors never returned. “I never heard from them again. I guess they didn’t find anything wrong,” Singer says.

Keith Singer
President
Singer Wealth Management
Boca Raton, Florida and Miami