Why Hiring Firms Sometimes Say ‘No’ to Strong Producers
Broker-dealers’ reluctance to hire and retain brokers with disciplinary or personal financial issues is deepening, and several compliance executives spelled out details of their vetting procedures at the Financial Industry Regulatory Authority’s annual conference this week.
Raymond James Financial Services scrutinizes mandatory personal financial statements from advisor prospects and matches them against credit reports, analyzes interpersonal behavior characteristics on visits that candidates make to its home office and requires candidates with suspicious records to meet and explain their histories to compliance, according to Mark Lontchar, chief compliance officer for the firm’s 4,550 independent contractors.
“More interesting is when successful $600,000 or $700,000 advisors will list $10,000 or $15,000 in retirement assets on their financial statement,” Lontchar said on a panel devoted to recruiting, hiring and heightened supervision practices. “We want to understand that. There are personal situations—and we are looking for candor and personal responsibility—but that would usually cause us to back away from a candidate.”
Brokers who would be required to be put on heightened supervision because of a history of client or regulatory complaints face all-but impossible hiring and retention obstacles, some conference attendees said.
Lincoln Financial Network, the independent broker-dealer unit of the insurance giant that sells investment products through more than 8,900 brokers, has simply eliminated heightened supervision programs for prospects or existing advisors, said Patrick Caulfield, chief compliance officer for the firm and for its wholesale distributors.
“If we have someone who’s a high-enough risk, we don’t affiliate,” he said, “or we fire them.”
Lincoln, which in 2013 agreed to a $175,000 settlement with Finra for failing to elevate supervision of a broker accused of running a Ponzi scheme, has a more limited “financial fitness” supervision program for brokers with credit issues. But Caulfield said it is drifting away from that program as well, and and has only about ten advisors in its retail and wholesaler businesses under heightened supervision.
The growing reluctance of firms to work with questionable brokers follows Finra’s new program to identify so-called high-risk brokers and the firms that hire them, and proposed rules that, among other things, would limit suspected brokers’ abilities to operate while under investigation.
Few firms have gone as far as Lincoln and independent broker-dealer Commonwealth Financial Network in eliminating a heightened-supervision option, but most have intensified their scrutiny of brokers with checkered histories.
“If there is background stuff, it triggers a mandatory meeting with compliance, and we have very direct conversations,” said Raymond James’ Lontchar, noting that similar procedures are in place at the firm’s smaller channel of brokers who are full employees. “Sometimes those are tear-jerking conversations about a terrible situation in their lives. Sometimes it’s a soap-opera script.”
Finra Chief Executive Robert Cook has promised a good-will approach to identifying high-risk brokers.
“We must consider that not all events – including events disclosed on BrokerCheck – pose the same level of risk,” he said last summer in outlining the new crusade against “bad actors” who have often moved easily among firms. “[A] broker who has an unpaid lien because of debt accrued due to a medical issue in her family must disclose that lien. That event should not be treated the same as fraud or stealing money from customers.”
The compliance officials at this week’s conference, though, said that they are getting tougher across the board. They want hard evidence that brokers with financial management issues have a “fitness” plan to whittle down debt without neglecting their business, and are impatient with big numbers.
“Sometimes someone never gets off a plan,” said Lincoln Financial’s Caulfield. “So we require a showing of immediate progressive and sustained improvement or have them deal with the business conduct committee.”
Lincoln also has a low tolerance for previously fired brokers, he said.
Finra wants to see more of such a comprehensive approach that combines analysis of complaint histories with background checks on retirement nest eggs, lifestyles and mortgages that can trigger bad behavior.
“Good firms are risk-based and put things together,” said Patricia Hatzfeld, a senior director in the regulator’s member regulation sales practice unit. “Good firms are proactive.”
Morgan Stanley increasingly views the hiring process as a “seminal moment” in determining potential trouble, and is trying to use data analysis to “figure out exactly who is going to be the next financial adviser to cause problems,” Dan Kosowsky, the former compliance director of the wirehouse’s wealth management business and now head of institutional securities compliance in the U.S., said on another Finra conference panel.
He cautioned, however, that collecting the right data and appropriately weighting information ranging from past complaints to personal lifestyles is a challenge.
“We are in the very early stages” of risk-rating individuals by smart data, he said. The firm is far from allowing algorithms to make hiring determinations, he said.
At least one executive said the risks of a bad hiring decision leading to supervisory regulatory complaints has radically changed his firm’s behavior.
“I used to be willing to hire a high-risk broker if I thought I knew them,” said Robert Muh, chief executive of Sutter Securities, a 12-broker firm in San Francisco. “I would not do that today at a small firm.”
Muh, who is a small-firm representative on Finra’s board of governors, said his firm is so fearful of brokers triggering a sales-practice violation that it now requires them to attest that they will not use social media for any business or firm purpose. “If they do, we part ways,” he said.