Welcome to Financial Advisor IQ

Lincoln, Raymond James Aim to Dodge Bad Actors When Hiring

By Rita Raagas De Ramos June 28, 2018

When hiring new brokers and advisors, Lincoln Financial Group and Raymond James Financial Services aim to steer clear of individuals who are so-called bad actors – and even those they deem have the potential to become one.

Self-regulator Finra identified curbing bad actors – or high-risk and recidivist broker-dealers – as its number one priority in its 2017 regulatory and examination priorities letter and kept it as a priority for 2018.

Last year Finra’s board approved a proposed rule amendment requiring broker-dealer firms to adopt heightened supervisory procedures for individuals while a disciplinary case is pending appeal and to reinforce and clarify the firms’ existing supervisory obligations concerning broker-dealers with disciplinary histories whom they employ.

The chief compliance officers of Lincoln and Raymond James believe the vetting of the candidate is the most critical part of the hiring process.

“A great place to start” for Raymond James is a “confidential profile” document that all prospective broker-dealers or advisors are required to fill out, Mark Lontchar, the firm’s chief compliance officer, said at the Finra annual conference in May.

The confidential profile includes information on the candidate’s general background (education, credentials, etc.); financial statement (to see how the advisor manages their own money and if the finances match the credit check); advisory practice (AUM, fee- or commission-based, investment process, etc.); and additional information that could help the firm understand why the advisor is thinking of jumping ship.

The additional information is fodder for “a very long and detailed conversation” that can help with the assessment of the candidate, according to Lontchar. These could include things like the candidate’s challenges at their current or previous firm, resources that are critical must-haves for the candidate and/or supervision-related issues.

Lincoln has a similar formal recruitment process, which consists of a review by the compliance team of the candidate’s registration, licenses and affiliations; a “very extensive preliminary investigation” of their credit and criminal history; and a review of previous affiliations listed in the Central Registration Depository records.

If there are “serious matters” that surface, Lincoln won’t necessarily give up on the candidate, but the case is sent to an “escalation committee,” according to Patrick Caulfield, the firm’s chief compliance officer.

Caulfield said Lincoln doesn’t believe in putting its broker-dealers or advisors on heightened supervision for sales practices, so “if we have someone who is a high enough risk” to potentially merit sales supervision, “we will not hire” that individual.

At Raymond James, the review of a candidate with a “checkered background” is a “concerted effort,” Lontchar said.

What Raymond James wants from such candidates is to take “responsibility” for their checkered background and “exercise candor” in explaining the circumstances and context to the firm, according to Lontchar.

“We want to understand what kind of person an advisor is like and how they treat clients,” Lontchar said. “Sometimes it’s absolutely a tearjerker about something that happened in their lives or sometimes it’s a soap opera script.”

Patricia Hatzfeld, senior director of Finra’s Office of Sales Practice, said broker-dealer firms that are doing a goob job with their vetting process tend to be the ones that check for behavioral issues, financial incentives and lifestyle.

Hatzfeld urged broker-dealer firms to look beyond the records that can be found in required disclosure forms. “You can’t ignore the external factors that are separate from BrokerCheck,” she said.

She stressed that the interview with the candidate is also a critical part of the hiring process.

Yet avoiding hiring bad actors or high-risk brokers may not be as easy as it seems, as shown by the case of Anthony Diaz, a registered broker-dealer for 14 years before he was barred from the industry in May 2015 for multiple reasons that the regulator said involved investor harm.

Despite customer dispute reports piling up in Diaz’s BrokerCheck record since 2004, he had managed to work at 11 firms – including Raymond James early in his career (2001 to 2004). Finra says Diaz was “fired from four firms” and “routinely engaged in efforts to mislead his customers into believing that he had left those firms voluntarily.”

By April 2018, Diaz had racked up 55 disclosures.