Selling your book of business? Make sure it is compliant

You want to ensure your business — and its compliance practices — will pass the scrutiny of the due diligence conducted by the prospective purchaser. How can you do that? Here is a list.

First, review each account to ensure the know-your-client (KYC) forms are up to date. That means a fresh KYC form has been completed in the past couple of years. An update to a KYC form should be meaningful. If you merely ask your clients to sign an updated KYC form that is identical to the old one, that is not a compliant update. You need to have meaningful discussions with each of your clients to ascertain their personal changes and document the changes with notes in the system. If your clients have experienced personal financial changes, you will need to consider the need for adjustments to their portfolio of investments.

Second, do an audit to ensure the investments in each account are suitably invested for each client. Don’t simply rely on a compliance officer or the branch manager. Consider over-concentration in any one company, sector or industry. If there is a reason for any over-concentration, make sure there is correspondence with the client that documents the client’s understanding and acceptance of the risks.

Third, if you are an MFDA or IIROC advisor, be sure that signed client forms were completed entirely before the clients signed them (different ink on the form might be a sign of irregularities).

Fourth, if your client base includes many senior clients (regulators say “seniors” are over 60): is there a succession plan and documents concerning the powers of attorney and the whereabouts of the last will and testament so that the advisor can assist with wealth transfer in a compliant manner? (As a side note, your business will likely be more valuable to prospective buyers if senior clients’ successors are also your clients. This way, even if a disproportionate amount of assets are held with older clients, the wealth will likely not disappear when the senior clients die.)

Fifth, are accounts for which the advisor takes instructions from a power of attorney properly documented? Do the assets continue to be invested suitably for the client, even though someone other than the actual client is instructing?

Sixth, if there is substantial trading on margin in an IIROC book of business, is there a collection risk? If you have an MFDA business, are there substantial sums of leverage loans, were the applications properly documented and is there evidence that clients understood the risks of borrowing to invest?

Finally, are there contemporaneous notes of client meetings and telephone conversations? If a client issues a complaint, is there evidence to reflect the conversations and support the advisor’s version of events that remain in the file, even after the advisor retires?

Health issues can be unpredictable, so have a plan to get your business in shape for due diligence scrutiny. This process can take a couple of years to complete, so don’t wait too long to begin. Even if you don’t plan to sell your business, it cannot hurt to become more compliant. Both securities and mutual fund dealers have obligations to audit, as do all the regulators (MFDA, IIROC and provincial securities commissions).

While there are other issues to address when selling your business, this is a good place to start. A sophisticated company or person seeking to buy your book of business will know what to look for, so doing your own compliance audit before inviting any bids can help you get a better price for your book of business.