When applying to register within the securities industry, whether as a registered representative of a broker-dealer or an investment advisory representative of an RIA, individuals must complete and file FINRA’s Form U4. The form asks for personal information such as employment and residential history, education, and designations, but is most commonly known for the section towards the end that requires individuals to disclose past events, including criminal history, disciplinary actions from a regulatory body, customer complaints, various financial events, and civil judgments.
Regardless of any mitigating circumstances, having any such “disclosure events” can complicate an advisor’s life and can sometimes even end careers altogether. Not only are most disclosures a permanent part of an advisor’s record, visible to the general public and included for review by prospective clients in the firm’s ADV, the process of dealing with the disclosure itself is also long and expensive, which can involve a formal hearing proceeding by the regulatory body involved.
In this guest post, Tyler Olson – owner of Olson Consulting LLC, an RIA located in Saint Joseph, Michigan – shares his own experience dealing with having a disciplinary disclosure on his U4 record, and the process he went through to move forward in the industry, establishing his own RIA and rebuilding his client base from the ground up after a 3-year ordeal led to a regulatory fine. Through his experience, Tyler learned valuable lessons and devised deliberate strategies to help him organize a failsafe system to avoid the same mistakes he made in the past.
Most importantly, Tyler has come to recognize that the three key characteristics that are vital to operating as a successful advisor are built around integrity and a strong ethical foundation. Specifically, endurance, humility, and respect are the central traits that will not only help advisors avoid potentially damaging mistakes but are also traits that will help an advisor persevere should they find themselves with a challenging disclosure event.
As he rebuilt his business, Tyler developed several strategies to discuss the disciplinary event in his background with prospective clients, organize his processes to prevent future mistakes, and stay abreast of industry trends by keeping up with the CFP Board and investor advocacy groups. He also maintains open communication lines with his state regulator (finding it is more effective to work with them proactively than trying to ‘stay under the radar screen’) and sticks to a structured weekly routine to keep his compliance protocol up to date.
Ultimately, the key point is that U4 disclosure events can be very difficult for any advisor to deal with, but by cultivating key characteristics, developing a strong work ethic, and having the right mindset, advisors who are given the opportunity to remain in the profession with a disciplinary disclosure really can move past the event and still build successful careers.
Where I Come From In The Advisory Industry
I began my career as a registered representative in the spring of 2005 with a mid-sized broker/dealer in the Midwest. My career for the first 10 years was nothing out of the ordinary for a registered rep – I built a business based on buying stocks, bonds, and mutual funds for my clients, with a view toward capital appreciation that would help them to achieve their financial goals.
As my compensation was derived entirely from these sales, documentation of client information, suitability forms, and other disclosures were a key part of maintaining my office and business. Later in 2010, the firm registered as an RIA, and I became a dually-registered advisor. The compliance documentation requirements, of course, continued to escalate, as my recommendations were now subject to oversight by FINRA (as a broker) and the SEC (as an investment adviser).
An Atmosphere of Inattention to Regulations As Well As My Own Mistakes Led To A Disclosable Event
Young brokers and advisors need a steady guide to help them develop an understanding of why our industry has rules. Ideally, firms would establish a culture built on ethical behavior and doing right by clients for its own sake… arguably the best way to encourage brokers and advisors to do right and making rules a moot point.
But in practice, when culture isn’t always perfect, or some people deviate anyway, having rules – and consequences for not following those rules – also helps to apply pressure to practitioners to comply with those rules. And regulators, not always knowing the culture and morality of a firm in advance, still expect advisors to also follow the rules as a way to formally demonstrate that they are doing what is legally expected of them.
Learning to understand the relationship between regulations and morals takes a lot of time, and advisors benefit when others with more experience take the time to train them and set a good example.
During my time at this firm, figuring out how to go through the process the ‘right way’ was a challenge. There was no formal training… only an implicit assumption that each rep “knew” how to do right for the client, and that everyone understood (and would follow) the rules accordingly.
Yet ultimately, this lax atmosphere of just hoping and expecting everyone to do the right thing, but not sufficiently following the rules to ensure it, led to the firm eventually closing its doors in 2015, when two reps engaged in selling away got clients into an investment that ended up being fraudulent.
My advisory business was under the umbrella of the same broker-dealer, but otherwise completely unrelated to these two men and their business. Yet I, too, was affected by the atmosphere, which had made it easy for me to let my paperwork become disorganized, especially given that the firm had not yet implemented a digital filing system (which meant everything was on paper).
Thus in 2014, during a firm audit conducted by our state securities regulator (after the incident with the other brokers, and a year before the firm ultimately closed), my paperwork errors were discovered. The firm required clients to fill out various forms, which depended on the nature of the relationship. In a few cases, clients entered conflicting numbers when it came to income, expenses, and net worth, and I failed to catch these inconsistencies when reviewing their files.
The end result was that I had a disclosable issue occur. In the process, I was required to disclose the issue on my “U4”, also known as the Uniform Application for Securities Industry Registration or Transfer, which must be filed by all representatives of broker-dealers, investment advisers, or issuers of securities.
FINRA and state regulatory agencies use information in the U4 to register and renew Investment Adviser Representatives. Information on the U4 includes basic information about the individual (e.g., personal information, work experience, licenses, etc.), and must include disclosures that pertain to criminal offenses, regulatory actions, civil judiciary actions, customer complaints, terminations, and certain financial circumstances such as bankruptcy. Some of this information, such as qualifications, employment history… and disclosure events, are available to the public.
While the brokerage firm was supportive of me initially, other independent events involving the other two company reps engaged in fraudulent investments (unbeknownst to them at the time they first bought into the investment) eventually caused the firm to close in 2015. And with the closing of the business, I could no longer rely on the firm’s support to defend me regarding the regulators’ concerns about my paperwork documentation.
In fact, once the state regulator initiated the process for a hearing proceeding regarding the matter, no other firms would consider hiring me, as the impending hearing made me an unknown risk. I did not know how long it would take for the hearing proceeding to be resolved, so rather than ask my clients to wait for my hearing resolution, I referred them to a couple of trusted advisors. As such, my business slowly trickled away over the next couple of years.
It wasn’t until January of 2017 that the proceeding was finally concluded. In the case of a few client files, it was determined that there were discrepancies in account applications and updates of such forms. No clients were harmed, but the organization and accuracy of data were found deficient.
Make no mistake; this was my fault. But even so, I wish that someone had been checking up on me. As while compliance oversight may sometimes seem overbearing, it’s there for a reason; in addition to trying to protect clients outright, it ensures that you’re following the rules properly, should the regulators ever come knocking. Because as my disclosable event shows, the fact that no clients were harmed doesn’t prevent regulators from taking action.
Making The Decision To Stay In The Industry After The U4 Disclosable Event
By this point, I did not know what I wanted to do with my career. During the time the proceeding was ongoing, an opportunity to move to Sweden presented itself. And because my wife and I love Scandinavia, we decided to go for it.
We loved our time in Sweden, but once we decided to have a child, we wanted to be closer to our family in Michigan again. During this time, I thought deeply about whether I would return to the industry and, if I did, what I would change about how I operated. I ultimately decided to return.
As an advisor overcoming a disclosure on my own U4/Form ADV, I can think of two reasons other financial advisors may not find my decision to return to the advisory business appealing, especially for those who feel protective of the industry’s integrity:
- Statistics are clear that advisors with disclosures are highly likely to have more occur, so why would the community want to give much time or consideration to such persons?; and
- The segment of advisors that do make disclosable errors or mistakes who are trying to overcome their past in an open and honest way is probably very small.
Nevertheless, being an advisor in the situation of overcoming a past disclosure and knowing that I need to take extra steps to show transparency, I am establishing good relationships with clients, and have begun to see positive results in my business.
That being said, I think it is healthy for the advisor community to talk about what such advisors must do if they want to succeed in the business meaningfully, and be an asset to the community rather than a liability while carrying the burden of a regulatory infraction that must be disclosed. It’s certainly a quagmire of an issue.
Can talking about it help strengthen the integrity of the advisory community? I think so. Please read on to see why.
The Lessons I Have Learned And The Specific Qualities I Strive To Cultivate To Move Forward
While doing what is in the client’s best interest is supposed to be the end result of following rules set out by regulators, the best way to develop a true desire and willingness to act in the client’s best interest is, ultimately, to start from the viewpoint of morality.
During the time I had off from work after our son was born in Sweden, I spent many hours deciding whether or not to get back into the advisory industry. I recognized two issues that I needed to resolve both in my head and in my heart:
- I needed to make sure that I did everything correctly and accurately, and that I would create a conducive environment to achieve that successfully; and
- I needed to decide on the best firm type and business model to put my clients’ needs first.
Given that I had the experience but no advisory clients, I had two choices: to find a broker/dealer firm that would hire me to build my business from the ground up or to start my own firm. I felt that working for a broker/dealer could be good for addressing issue #1, but it would not help me with issue #2 because of the type of people I would tend to work with (at least based on my prior experience).
After spending time reflecting on these issues, we moved back to Michigan, where I decided to register an RIA.
I decided that a flexible monthly subscription model would be the best fee structure for my disposition, and the type of clients I liked and wanted to work with. I tend to gravitate toward young families with student debt and business owners, and I wanted to focus on giving advice, not managing assets.
Positioning Myself With Transparency And (Re-)Building Client Relationships With A U4 Disclosure
As a financial planner running my own firm, there are literally no other people who I need to ensure are always doing the right thing. I only have to make sure that I am doing the right thing. And that I am organized and methodical about my own business and serving clients.
But rebuilding wasn’t just a matter of setting new compliance processes and procedures for myself. In order to manage the existing disclosure on my record, I had to determine the answers to additional questions, such as:
- Aside from including the disclosure in the firm brochure (Form ADV), should I do anything more?
- Should I highlight the disclosure to the client before they read it themselves, or should I take a more passive approach of letting them discover it on their own (if/when they read through the documents in detail)?
- If I bring it up to prospects, when should I do so?
- How should I explain it, and how detailed should I be?
- What tone should I have? Apologetic? Minimizing? Reassuring?
I decided that I would be proactive about telling clients during the contract-signing meeting, and I came up with a succinct and clear explanation that would have no trace of blaming anybody but me.
The explanation I give always coincides with the delivery of the firm brochure. If at all possible, this is done in-person and with the delivery of a paper copy. While I do email updates of the brochure to clients, I initially give a paper copy because I like to actually turn the page to the disciplinary section as part of the explanation.
I usually say something to the effect of:
All advisory firms have rules that they must follow. These rules are set by the SEC and state regulators. One rule is that we have to write a brochure that clearly explains all the important aspects of the company and any information that is relevant to your decision about whether to hire me or not.
You should read this entire brochure as soon as you have time to do so. But one section that is very important for you to pay attention to is the section regarding disciplinary history.
I turn to section 9 (which includes the disciplinary disclosure) and then continue:
Advisory firms are regularly audited by state regulators to make sure that we are following all of the recordkeeping rules and other rules as well. During an audit that I was part of, several errors in customer paperwork were discovered. As a result, I was fined $1,000, as you can see here in section 9. I wanted to point this out to you so that you were not surprised or confused by it later when you were reading it at home.
As a result of disorganization on my part, these errors were my fault. But I want you to know the steps I have taken to make sure that it does not happen again. The firm I was with before required various types of account forms and applications that the client had to fill out. This is the main reason why there were discrepancies. With my business, there is just one set of documentation that will be maintained for you. Also, all paperwork is digitized and automatically cross-checked to make sure that there are no discrepancies.
Even though I have taken these steps to ensure good organization and accuracy, it is important for you to consider this past issue in deciding if you would like to work with me. I really would like to work with you, but more importantly, I want you to be in a good, comfortable relationship with your advisor, whoever he or she may be. Do you have any questions right now about this? Of course, you can always ask me questions later if they occur to you.
There may very well be many factors that lead to a disclosable event, including some that are out of your control. But all that matters to the person in front of you at that moment is your credibility, character, and forthrightness.
So far, I have not had a client change their mind due to this disclosure. Unless things change, I think I have found a good method for overcoming this challenge.
Cultivating The Habits It Takes To Overcome A Prior Regulatory Mistake On Your U4
Every time I have an opportunity to meet another advisor, I grow in my appreciation for being a part of this community. I do not consider myself to be anything special, but I have learned a few practical things from my experience that may be supportive of our community. I am proud to be a part of it, and I am eager to contribute to its reputation in a positive way.
With that in mind, there are three phases surrounding disclosable events, along with three corresponding qualities that advisors need to cultivate in order to avoid this situation: Respect, Endurance, and Humility.
If an advisor were to become subject to a disclosable event, having these qualities will help them successfully overcome the challenging circumstances that ensue.
Preventing Mistakes and Errors – Respect
Advisors must be careful to maintain a deep respect for all involved. Cultivating a desire to do right by people requires active thought about what one is doing each day, and how it affects others.
This isn’t simply about whether or not a client gets harmed. In my case, no clients were harmed financially. But, because of all that transpired, were they not harmed in other intangible ways? Any unnecessary anxiety that an advisor causes their clients is going against what we said we would do, right?
Maintaining respect for the people we work with, and the trust that they have given us, goes a long way to making sure we never take our position of trust for granted.
And that respect should translate into action: strictly adhering to client-protective guidelines and ensuring every action we take is in the absolute best interest of the client. Not because we have to, but because we deeply respect the people around us.
Dealing with Mistakes and Errors that Have Been Made – Endurance
Even if an advisor has the truth on their side, dealing with mistakes that regulators determine need to be investigated is arduous. Endurance is a necessity to come out from the other side with your head and heart intact. In my case, the process took over 3 years. I was exhausted every day because I felt that my livelihood was at risk.
Maintaining good relations with family, friends, and colleagues is a must to help one endure. I am grateful to my wife, who supported me more than anyone will ever know. Accordingly, it is important that you do not internalize all of your emotions. Communicating with your partner and close friends will go a long way to preserve these important connections and endure the ordeal.
The greatest enemy of friendship is pride. Pride is especially likely to rear its ugly head when employment and reputation are at stake. The best way to prevent speaking and acting selfishly or pridefully and damaging relationships is being open about your feelings, your weaknesses, and acknowledging that you need emotional support.
After the Dust Settles – Humility
In this business of advising people, managing assets, and helping people make important decisions, humility does not often come naturally. In we’re not careful, the more we know and the more experience we gain, the more insufferable we can become.
If an advisor does go through the ordeal of a disclosable event and decides they want to continue in the profession, humility is a must. There are at least three reasons why:
- If an advisor is given the opportunity to come back, humility will help the advisor to remember what a privilege it is to be back, and that being back does not mean they are something great. If anything, one should maintain a humble view of oneself to make sure they learn from their mistakes and never repeat them.
- There will be opportunities that the advisor will be excluded from because of their past. I have experienced this myself. Some doors will not be open to advisors with disclosures. If one is not humble when faced with this reality, then anxiety, bitterness, and even depression can take hold and affect one’s life and work.
- The only way forward is for the advisor to own their mistakes when talking to clients. When we ask a client to work with us, we are selling ourselves to them. We are offering our competency, our experience, our wisdom, and our integrity. We have no right, even subtly, to pass the blame onto anyone our clients don’t know. Past mistakes don’t negate the good that we can do for our clients going forward, as long as we are upfront about them and that we give our clients a comfortable opportunity to reflect on whether our past would have a negative impact on their peace of mind and confidence in us. We must humbly put our potential clients’ well-being ahead of our own livelihood in this respect.
Cultivating these qualities now, regardless of what situation someone may be in, will help advisors do better in their jobs, and to be a better friend and partner.
Unfortunately, though, respect, endurance, and humility – while crucial to persevere through a disclosure event – are sometimes not enough. Even if they haven’t done anything wrong, an accused advisor must have a firm that is supportive (though unfortunately, the degree of support is often correlated with how profitable a rep or advisor is to the brokerage firm, which makes one’s personal network of support all the more important!), or enough personal savings to hire competent legal counsel.
As far as legal liability is concerned, this is just a reality of the business.
Realizing Future Success: Acting On What I Have Learned From Investor And Advisory Advocates
Now that I am in the RIA space instead of the BD/hybrid business, I feel like I’m in the right place.
It has taken a lot of time to make sure I fully understand what is expected of me (as a firm and as an advisor). But even though there’s a lot to do to make sure I am compliant, I think the day-to-day business practices of the firm and business model I have constructed are as congruent with industry guidelines and moral principles as possible. Having the business designed this way makes it easier to improve myself when it comes to cultivating respect, endurance, and humility, not to mention other qualities as well.
From a regulatory standpoint, the name of the game is consistently and efficiently producing proof of what we are doing for our clients and why we are doing it (a key part of the rules, beyond just doing the right thing for clients itself).
To ensure that I keep up with industry standards and the trends and viewpoints of regulators, I do three things:
- I pay a lot of attention to organizations like the CFP Board, investor advocacy groups, and other individual activists who highlight what is happening in our industry and what could happen; I also ask penetrating questions around what should be happening from a regulatory standpoint. Becoming a contributing part of the #fintwit community was an integral part of this step.
- I communicate a lot with my state regulator (Michigan). This is the opposite of what I was taught in the early years of my career, which was based on the directive, “Don’t poke the bear” – as if taking the initiative with regulators would let them know you exist and would place you on their radar to make your life miserable. I was young and not in charge, so I toed the line. Now, though, I see that approach was foolish and reactive. I’ve had multiple phone calls and email exchanges with my state regulator, as well as an audit last year. Those conversations have helped me make decisions about how I would organize things most effectively and even helped me with software decisions. Especially since the world of monthly subscription advice is relatively new with its fair share of ambiguity, my proactive approach, talking with regulators about what records I need to maintain and where the lines are with respect to reasonable fees (%, hourly, monthly), has led to clarity and confidence in what I’m doing. I know I’m servicing my clients the best I can when I strive to do what’s right, and I can show the proof for it. In this industry, documenting and being able to prove that you are acting in your clients’ best interests is an integral part of acting in their best interest.
- I carve out time each Friday morning to act upon my compliance protocol. I review everything that was done the past week and follow through on a checklist for each meeting, each recommendation, and each client. I developed this checklist myself after reading the state rules and regulations that govern RIAs in Michigan. This method mitigates the risk of relying on my memory alone or finding reasons not to keep records because I’m the only person that I have to keep track of.
Advisory industry regulations are very complicated because the business itself is fraught with potential conflicts and has so many players in the game. There are certainly many things from a regulatory standpoint that need to be improved to raise the standard of integrity across the board.
Nonetheless, the existing structure is workable so long as the advisor maintains respect for the system and appreciates the underlying moral principles that prove its value. Yet we are all imperfect to varying degrees – the possibility of disclosable issues is not beyond any of us. There is much each advisor can do every day to prevent that from happening.
So, control what you can, keep a high standard for yourself, and cultivate respect, endurance, and humility, among other good qualities. If you find yourself facing discipline, recognize that you can come back… but only after you accept what was done, and learn from it with humility.
Consistently demonstrating these qualities in front of your partner, colleagues, superiors, and clients will be difficult. But it is the only true way to come back. If an advisor who endures a disclosable event takes these steps, personal and professional success is certainly still within reach.