What does spring cleaning mean to advisors?

As a result, other obligations, such as making sure paperwork is properly completed and filed away and that client meetings are properly memorialized, may have been neglected. So, how do advisors ensure that this clean up is done properly so they don’t expose themselves to litigation, or regulatory investigations and enforcement matters?

Advisors and dealers have asked me on various occasions whether I can review their processes to “bulletproof” their businesses. There is no magic formula that can bulletproof an advisor’s business, but there are processes that can be installed to reduce your risk substantially.

One such advisor, let’s call him “Hank,” asked me to help him improve his processes. He had a huge book of business and I had him fill out a questionnaire that I developed so I could quickly learn the type of business he carried on. After Hank completed the questionnaire, I met with him and then I met with each of his team members. During our discussion, he said that he took handwritten notes at every client meeting, particularly those that led to the preparation of the know-your-client (KYC) form.

After meeting with Hank, I met with his right-hand person, his assistant; let’s call him “Frank.” I asked Frank to bring me one of Hank’s files so we could review it together. The file Frank brought looked like a hurricane had hit it. It was bulging out of two accordion file folders and there were no subfiles or any organization to it at all. Frank told me that most of the files were organized better in computerized databases, so I looked at the databases as well — and they were no better.

I asked Frank to take a minute and pull for me the KYC forms that had been completed for each of the accounts opened for this client. He fished through the file and found three KYCs: one each for both Mr. Client and Mrs. Client’s RRSP, RESP and cash accounts — as well as one for their joint account. The KYC forms looked fine, but there were no notes that corresponded with each of the KYC forms, and the information on the forms raised red flags for me as the information from year to year was inconsistent, with no notes of explanation as to why it had changed.

I made two basic suggestions to Hank and Frank:

1. For each client file there should be the following subfolders:

(i) correspondence (emails, letters, etc.);
(ii) KYC forms with handwritten notes or electronic notes supporting each KYC form;
(iii) regular communication to all clients (list of mass mailings etc.); and
(iv) “other” for anything else that doesn’t fit into the categories above.

2. Don’t look at KYC in a vacuum.

For each client’s KYC form updates, compare them to the previous KYC forms. If they are different, find out why the client information has changed. For example, a client might change his job. get a big bonus. or the client might suggest a higher or lower risk tolerance.

Regulators and judges will compare the KYC forms for any complaining client and ask the advisor to explain the changes. It will be next to impossible for the advisor to remember the reason for the discrepancies without some type of memorialization. Furthermore, even if the advisor does remember, if his or her version is different than the client’s version of events, the advisor’s explanation will not be believed without notes of client discussions.

During RRSP season, advisors rush through to get it all done. After you have caught your breath, go back into your client files — both electronic and paper — and make sure that you have done the KYC work properly. If not, meet with each client and formulate a paper trail that either explains and supports the inconsistencies, or revises and fixes the KYC form to ensure it is accurate.

So what does spring cleaning mean to advisors? It means that you might have to put off cleaning in the garage until autumn.