The Compliance Censors

A few years back, when I was a producing financial advisor, I took it upon myself to send a newsletter, of the approved in-house variety, to my clients. The newsletter commented on markets, asset allocation issues and the economy. To add a personal touch, I attached a postscript recommending a book to usher in the new year (Tuesdays with Morrie, by the sportswriter Mitch Albom). Before the package

A few years back, when I was a producing financial advisor, I took it upon myself to send a newsletter, of the approved in-house variety, to my clients. The newsletter commented on markets, asset allocation issues and the economy. To add a personal touch, I attached a postscript recommending a book to usher in the new year (Tuesdays with Morrie, by the sportswriter Mitch Albom).

Before the package went out, it traveled to the compliance department, which, to my surprise, immediately bounced it back to me with the P.S. portion of the letter blacked out. I was informed that recommending a book — apparently any book — was a no-no, compliance-wise.

The episode left me wondering: Had Yossarian, the Catch-22 protagonist who famously deleted random elements from letters he was screening, come to work in our compliance department? I'm hardly the first to have been touched by such a seemingly capricious hand.

Given all that hinders advisors from making money these days, you'd think that firms would try to clear away as many internal obstacles as possible, particularly when reps are trying to add a light, personal touch. However, when it comes to the compliance department, the opposite has happened.

In some ways, this is to be expected. I am keenly aware of the duty the compliance department has to protect the firm by ensuring all information originating from the company is “bullet-proof.” This is a daunting, even impossible task. And it is made even more dangerous by the litigious leanings of the investing public.

Still, as part of their effort to cover all bases, many compliance departments are going too far. I have got to wonder sometimes if they're even reading the stuff they're deleting. And if they are, whom do they think they're protecting?

What possible negative consequences could my newsletter attachment recommending that my clients read an inspiring book about a dying man's relationship with a young writer produce? Would someone receiving this newsletter sue me or my firm because they actually purchased the book, didn't like it, and felt deserving of compensatory damages? Gosh, what punitive damages might arise from such a suit? That's an unlikely scenario, even in a society where a consumer sued McDonald's when the coffee she spilled was too hot.

The worst part of this is that many financial advisors view detailed communications as their best method for neutralizing client anxieties and keeping their names in front of them. But those details are what trouble compliance officers. Since they have little ability to quantify the potential damage of a financial advisor's communiqués, they default to the safest action: the veto.

There is a solution to this problem, though it's difficult to implement: Put the Prudent Man Rule into action. As Justice Samuel Putnam of the Massachusetts Supreme Judicial Court, put it so eloquently in 1830:

All that can be required of a trustee to invest is, that he shall conduct himself faithfully and exercise a sound discretion. He is to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.

Surely, this text can be adapted to address the role compliance plays in the exchange of information between advisor and client. As the compliance people look over these exchanges, they must be able to see the importance of guiding and advising clients in a way that avoids reducing the messages to the level of drivel heard on national financial broadcasts. In short, they must find a way to let the advisors do their jobs.

We owe our clients at least this much.

Writer's BIO:
David N. Isreal

a former rep with Merrill Lynch and Prudential Securities, is a freelance writer based in Newton, Mass.

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