Welcome to Financial Advisor IQ

Here's Your Best Defense Against Wayward Clients and Bad Finra Exam Results

By Rita Raagas De Ramos June 7, 2018

Documenting and monitoring advisor-client interaction is the best defense against Finra exams and client complaints, according to broker-dealer firms.

“Our approach is to document everything … it’s the best protection against regulators and wayward clients,” Mark Cresap, president of Cresap Inc., a broker-dealer firm based in Radnor, Pa., said at the Finra annual conference in Washington, D.C. in May.

Cresap says it’s important for a broker-dealer to “get the client objective absolutely right” and for the client to have a “foundational understanding” of the broker-dealers' financial or investment plan based on those objectives.

Documenting meetings and interactions between broker-dealers and advisors will ensure both parties understand each other, which will help manage expectations and prepare clients for volatile periods in the capital markets and how those could potentially impact their portfolios, according to Cresap.

Cresap credits his firm’s attention to documentation and monitoring of the documentation process for not having a single customer complaint on record in more than 20 years. In instances when Cresap felt a client was headed toward filing a complaint, based for example on the “tone” of a client during an inquiry into an account or a transaction, he says he was able to satisfy the client’s queries or concerns by reviewing their records.

Classified by Finra as a small firm, Cresap Inc. has fewer than 40 employees and around $209 million in AUM. The firm was set up in 1989 and has zero customer dispute disclosures in its BrokerCheck record. But the firm has two regulatory disclosures – one related to the Bank Secrecy Act and another related to the Anti-Money Laundering Program – for which the firm was fined $5,000 each without admitting or denying allegations.

At Advisor Group, an independent broker-dealer network, documentation of client meetings and communications helps the broker-dealers “form a recommendation” and helps the firm with supervision, according to Mary Simonson, the firm’s chief risk officer.

The documentation is stored electronically, from the advisor’s first meeting with the client, to writing up the client’s profile, to a risk tolerance Q&A, among other things, Simonson said.

“It’s important for us to see and capture” all the advisor and client communications for compliance purposes, she said.

Advisor Group has four broker-dealers in its network: FSC Securities, Royal Alliance Associates, SagePoint Financial and Woodbury Financial Services, with more than 5,000 affiliated advisors.

Advisor Group uses Salesforce to store all these records, and the firm is satisfied with all the notes that can be gathered in this CRM system, as well as the “bells and whistles” that can be input into the system, according to Simonson.

Simonson acknowledges, however, that many of the “older advisors” don’t like taking down and keeping notes electronically. “They still prefer notebooks.”

Advisor Group doesn’t impose any specific method for documenting interactions with clients, but “every advisor should use a system,” she said.

Bill Bell, district director at Finra’s Philadelphia office, agrees with the importance of documentation.

“Otherwise, what you’ll get is a 'he said, she said' [situation] if nothing is written down,” Bell said.

When documentation is absent or lacking, Finra will “have to make a decision on who is more credible and all we have to rely on is the client account information,” Bell said.

Bell said Finra wants “to see records” when it conducts its sales practice exams. “Notes really go a long way.”

Cresap added that “extemporaneous notes are gold, invaluable” because they tend to add to the credibility of the records.

Repetitive or boilerplate notes – such as those that say nothing more than “good to go” or “met for lunch” – offer no insight to the interaction and are not as credible, according to Finra’s Bell.

Daniel Stefek, district director at Finra’s Atlanta office, said “having good notes” is the “best way” for Finra to “move through and shut down the complaint,” assuming it’s a false complaint, during so-called cause exams. These cause exams investigate allegations of customer harm typically directed at registered representatives and supervisors.

“We don’t care how notes are kept. We are concerned when they are made up or altered,” Stefek said.

Advisor Group’s Simonson said the advantage of storing the notes electronically is “if it’s in a system, it’s harder to manipulate.” The date the notes were inputted, for example, is recorded, she said.

For firms with limited resources, using the “pen and paper is OK,” but “there can be drawbacks,” such as “readability” or “dependability,” according to Finra’s Bell.


Bell said alternatives to pricier recordkeeping systems could include using emails.

“One rep would type in an email and email to himself the notes” about the interaction with clients, and that works because it's “unaltered, can be easily retrieved, can be forwarded,” Bell said.

Bell said going a step further and emailing the client the summary of the interaction – particularly the ones involving investment decisions and fees – would also be beneficial for the broker-dealer firm.

In some instances, such as when clients have children who are account beneficiaries, a “confirmation email” sent by a supervisor about the interaction with the client “could help” because “parents are not always fully disclosing to their children what they are doing with the money they are drawing” from their accounts.

Cresap said his firm’s broker-dealers do indeed use email recordkeeping to complement their “contact management system.”

He noted that the contents of emails tend to be less guarded and thus have provided him with “more clues” when he reviews interactions with clients.

Cresap believes everything that “supports the pursuit of the investment objective” – the execution of the investment strategy and any change in a client’s financial circumstances – must be recorded.

In a fee-based account, it’s important to keep documenting and monitoring even when there are no changes to the portfolio, according to Cresap.

“I look at the inactivity report that covers 12 to 18 months,” he said. “It is essential you document that there is an effort to implement a strategy and not just collect a fee.”