Creating a Firm Culture That Puts Your Clients First
When you and your clients make the mutual decision to engage in a relationship, it generally starts with a shared vision and some level of trust. From there, in order to continually build the relationship, you must go about creating a firm culture that puts your clients first. But what exactly does that entail?
Here, we'll focus on three key areas of fostering a client-focused culture: recognizing and abiding by regulatory responsibilities, encouraging transparency, and maintaining ongoing communication, including proactively planning for significant life events.
Of course, with any relationship comes responsibility. But in the case of your securities client relationships, you have an actual regulatory obligation to ensure that you know your customers and make suitable recommendations. By knowing which regulations apply to you, you can help create a culture of responsibility. Here are just some of the regulations to keep top of mind:
FINRA Rule 2090 (Know Your Customer). This rule requires registered representatives to “know (and retain) the essential facts concerning every customer and concerning the authority of each person acting on behalf of such customer.”
USA PATRIOT Act. In an effort to fight terrorism and money laundering, Section 326 of this act requires financial institutions to establish a customer identification program to verify the identity of any person seeking to establish an account.
FINRA Rule 2111 (Suitability). Under this rule, registered representatives need a reasonable basis for believing that a recommended transaction or investment strategy—whether to buy, sell, or hold—is suitable for the customer. This must be based on an independent evaluation of the personal facts and circumstances that your client has disclosed.
Investment Advisers Act of 1940. If you’re an Investment Adviser Representative, this act, along with various state regulations and common law, imposes a fiduciary duty on you. Among other things, you are responsible for the following:
- Act in the best interest of your clients at all times.
- Provide individualized advice that’s unique to your client based on his or her financial situation, age, income, liquid net worth, risk tolerance, time horizon, investment objectives, and investment restrictions or instructions.
- Clearly document your suitability determinations, including a full disclosure of relevant facts and potential conflicts of interest.
- Meet or speak with each managed client at least annually to ensure that the allocation you’ve suggested still coincides with the client’s financial goals and objectives.
As the representative and/or advisor, you must independently demonstrate why your clients’ investment selections or strategies are reasonable and appropriate with respect to their specific financial situation and objectives. Further, an independent third-party reviewer must be able to reasonably determine why a specific recommendation was suitable for a client based on your documentation. In short, you must foster a culture of transparency.
Document, document, document. Based on disciplinary actions in the industry and through our own experience during regulatory exams, we cannot stress enough the importance of maintaining detailed notes and documentation. Maintain client notes via the client's file or your CRM, and be sure to include detailed observations that demonstrate the reason for your action or inaction related to client accounts. To help determine whether your files have sufficient detail, consider the following:
- Were product/strategy risks and benefits clearly illustrated?