Since the fiduciary rule was passed, regulators have been clamping down on advisory firms for failing to protect the rights of clients. Advisers must make sure they are putting their clients’ interest ahead of their own, says Todd Cipperman, founding principal of Cipperman Compliance Services.
To help planners spot the red flags of noncompliance, Cipperman identified 10 potential conflicts that may bring on an enforcement action.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Sept. 12, 2016. U.S. stocks rebounded after the biggest rout since June wiped about $500 billion from the value of equities, while Treasury yields held near two-month highs before the Federal Reserve's Lael Brainard official speaks. Emerging-market assets slumped. Photographer: Michael Nagle/Bloomberg
Michael Nagle/Bloomberg News
Recommending the wrong share class
The SEC has brought several cases where wrap or managed account sponsors recommended share classes that were not the lowest-cost available. In many cases, the SEC alleged a conflict because the respondent received some sort of financial benefit such as loads or revenue sharing.
Businessmen pass tailors' stores on Savile Row in London, U.K., on Thursday, June 9, 2016. Photographer: Chris Ratcliffe/Bloomberg Savile Row has been synonymous with British suits since 1733. Photographer: Chris Ratcliffe/Bloomberg
Favoring certain clients
The SEC has criticized firms for allowing redemptions to favored clients after telling other clients a fund was closed to withdrawals or by selling out liquid investments for insiders and leaving outside clients holding illiquid investments.
Recommending proprietary products
Regulators highly scrutinize advisers and broker-dealers that recommend proprietary funds or managed account programs that include built-in fees.
A heart shaped stress ball sits between screens of a broker on the trading floor during a charity day at BGC Brokers L.P., a unit of BGC Partners Inc., in London, U.K. on Monday, Sept. 12, 2016. BGC Partners and Cantor Fitzgerald hold an annual charity day to commemorate colleagues who died in the Sept. 11, 2001, attacks at the former site of the Twin Towers in New York. Photographer: Luke MacGregor/Bloomberg
Making sweetheart deals with affiliates
The SEC doesn't like firms who feign independence and then recommend affiliates for ancillary services to jack up revenue.
Calculators and paperwork sit on the top of seats at the close of trading on the floor of the open outcry pit at the London Metal Exchange (LME), on the last day of trading at their Leadenhall Street premises, in London, U.K., on Wednesday, Jan. 27, 2016. The London Metal Exchange will move to a new building at 10 Finsbury Square. Photographer: Luke MacGregor/Bloomberg
Manipulating valuations to increase fees
Firms have tried all manners of schemes, including the use of friendly broker quotes, lying about inputs, and using non-economic options trades.
An employee looks at figures featuring social media monitoring inside 'The Pulse' department during the opening of the Royal Phillips NV APAC Center in Singapore, on May 19, 2016. The new Philips Toa Payoh campus houses the company's APAC headquarters. Photographer: Nicky Loh/Bloomberg
Lying about performance or strategy
The SEC views misleading marketing materials as a form of conflict of interest. There have been many criticized practices including using backtested data, failing to describe a strategy’s true risks, omitting poor recommendations from performance calculations, and cherry-picking time periods.
U.S one-hundred dollar banknotes are arranged for a photograph in a money clip in Sydney, Australia, on Thursday, July 24, 2015. The Australian dollar slumped last week as a gauge of Chinese manufacturing unexpectedly contracted, aggravating the impact of declines in copper and iron ore prices. Photographer: Brendon Thorne/Bloomberg
Taking undisclosed fees
The fee may appear legitimate — and maybe the client should have known — but, without specific written disclosure, a firm looks like it has engaged in a classic conflict of interest when it surreptitiously takes undisclosed compensation. Examples include payment of overhead expenses, consulting fees, and investment banking fees.
A durian trader uses a calculator while the fruit is sorted at a road side stall in Titi, Negeri Sembilan, Malaysia on Monday, July 13th 2015 in Johor, Malaysia. The Southeast Asian native fruit -- known for its sweet, custardy flesh and banned from Singapore's subways and hotels because of its pungent odor -- can retail for more than S$40 ($30) apiece in Singapore. Photographer: Sanjit Das/Bloomberg
Firms have found regulatory trouble by overbilling clients by using an opaque billing formula such as changing measurement dates for valuing client assets or failing to deduct unrealized losses.
Several firms have been prosecuted for using omnibus accounts and then retroactively cherry-picking good trades for proprietary accounts and not-as-good trades to client accounts.
Lying about qualifications
In addition to performance, the SEC has also faulted firms who lie about their academic or business qualifications, the firm’s AUM, or the firm’s financial or disciplinary record.