Compliance: Here are the only 3 things that matter
Advice Processes & Best Practice Advice & Compliance & Financial Advice

Compliance: Here are the only 3 things that matter

June 21, 2019
by Tony Vidler  CFP logo   CLU logo  ChFC logo 

Whenever the topic of the “advice process”, or compliance, comes up most advisers imagine themselves as the plane in this picture:

oh crap

Compiance is largely considered a burden – albeit a necessary one.  As is usually the way of these things a substantial body of documentation has blossomed over the years which is now considered the “right way” of proving compliance.  However that should be challenged.

Just because a methodology has become the accepted norm it does not automatically translate into that being the best way of doing things.  To paraphrase Henry Ford; if in his time he had accepted the conventional wisdom that the way of th world was right then people would not have wanted cars. They would have wanted more, and faster, horses.

Compliance as we know it today is a drag for everyone involved – including clients – given the accepted wisdom requires a bunch of stuff being put into writing that nobody involved in the process actually is terribly interested in.  The regulators get blamed for this of course, however if we are honest the regulators have more often than not simply adopted processes which have evolved in the “best practice” end of the industry and decided they are a good starting point for the rest of the industry.  Then lawyers get involved.  That’s when the trouble starts really and the gap widens between what the customers value; what the advisers understand actually matters; and what the regulators will approve of as “evidence of good provess”.

But generally (in my experience anyway) the regulators are not terribly interested in actually hurling missiles at good advisers.  They are definitely on the hunt for the bad guys, but they aren’t trying to shoot down the good ones.  They just need a methodology which they can use to check every so often to be sure who the good ones are.

Overlaying all of this is that consumers crave convenience and simplicity more than ever, and technbology introduces a multitude of different ways of engaging and evidencing that engagement.  It is a dynamic time…and too dynamic for static processes to remain relevant for terribly long.

So our thinking should move forward and challenge the accepted wisdom.  Surely we should encourage innovation in best practice process, and if so then I think that the regulators in this country at least have got something very right in focusing upon the process “achieving good client outcomes”, and then leaving it to the market to determine how they will do that and evidence it.

Bearing that in mind we then need to turn our thinking back to the client engagement and begin our thinking from the perspective of what outcomes are good.  The first of those, simply because it is generally top of mind for clients, is to not create barriers with process.  That is; our process should not in itself be a barrier to encouraging engagement.   Most clients just want to get on with making their investments, or getting their tax problem sorted, or putting the damned insurance in place! “Just get it done already” is the prevailing attitude of most clients, right?

But then there is the second element to consider: it is only true that nobody cares about the process or the paperwork when everyone is content.  

As soon as there is an expression of dissatisfaction by a client where they expected (or still expect) a different outcome then the process matters.  This is where the legal perspective of having an abundance of paper-based documents produces some value.  I say some value because it is arguable that merely have a large body of evidence is what matters.  Amongst the large body of evidence produced by todays compliant advice process what is it we are actually looking for wihich is of value though?

In amongst all the process and paperwork though there are 2 critical points of exposure for an adviser.  Ensuring that these are covered adequately requires the 3rd key component to be included.  So when you get right down to it these three principles are actually the only 3 things that matter when it comes to creating a great advice process.

1.  The clients interests are paramountdownload

2.  Recommended actions are suitable.

3.  You can evidence these first 2 points.

It is inevitable that in the event of a complaint the fiduciary aspect of the relationship will be challenged, as it is inevitable that every adviser will incur a risk of conflict or there will be a perception that a poor outcome was driven by conflicted advice.  Even those who are selling time and expertise by the hour will be challenged at time of complaint….”the plan was so big and cumbersome because you were trying to pad up fees”….”you made it more complicated than it needed to be so you could charge more – and that is why it didn’t work!”

Understanding that the fiduciary responsibility will be challenged virtually every time (in practical terms), and understanding also that in the real world virtually every single piece of advice given involves compromise on the part of the client, the way to ensure there is an ironclad link between “placing the clients interests first” and “ensuring suitability” is to ensure the clients priorities and compromises are captured, and kept.  Professionals generally have no problem providing comprehensive and detailed recommendations – but clients usually have a problem with either paying for all the solutions to be put in place, or fully doing the tasks required to implement the recommendations.  So the advice – or recommendations – are usually compromised in some fashion by clients.

THAT is where point 3 comes in….being able to evidence that there was compromise.

To most clients most of the time disclosure doesn’t matter.  Written plans don’t matter much mostly.  Most of the advice process we work with doesn’t actually matter much to most clients most of the time, because clients deal with someone they trust.

Having said all that, of course we have to comply with the rules of the road when driving, and of course we have to comply with the rules of engagement when advising.  While grappling with the rules of engagement and making sure you are compliant remember though that the absolutely essential parts of that engagement process are being able to demonstrate later that you placed the clients interests first, and that your advice was suitable, especially in light of any priorities or compromises introduced by the client.  Frankly it shouldn’t matter whether you evidence this with a 40 page report or a 40 minute video recording of the entire recommendation discussion with the client.  The format of the evidence should not matter to regulators – it wouldn’t really matter inside a courtroom I would venture to suggest.  Evidence is evidence, provided it meets evidential rules.

Evidence of suitability, driven by the avoidance of conflict and matching clients needs with recommended actions, however you capture and keep it, is really what it all comes down to.

You may also find this post useful:

How to explain your process and fees to clients

Get financial adviser coach blog updates via email.
Enter your email address to follow this blog and receive notifications of new posts by email.
Join 315 other followers

Facebook: 2831, Twitter: 13333, LinkedIn: 689

Follow tonyvidler on

Comments (0)

Leave a Reply