Investment Advisor Conflicts

 In this article we are going to examine the use of social media and its impact on investment advisors and their representatives.  Additionally, we will explore best practices for investment advisors to disclose potential conflicts of interest and to manage their fiduciary duty to the client.

LinkedIn, this feature is almost impossible to ignore. Why should investment adviser representatives be concerned about LinkedIn endorsements? Similar to a Facebook “like,” this nifty LinkedIn feature prompts clients to endorse your experience and services, which may inadvertently create a client testimonial.

The Advisers Act and most state regulations prohibit the use or publication of client testimonials, which generally include a statement by a former or present advisory client that endorses the adviser or refers to a favorable investment experience with the adviser.

Unlike LinkedIn recommendations — written statements of recommendation typically not proactively requested or proactively given — skill endorsements do not require the endorser to write or type anything. With just one click a user can send a positive message about another user without leaving a comment.

Assessing 1^st Connections

What should you do? The best advice is to ensure that you are not linked or do not have a “1^st connection” to your clients. This will prevent unintended endorsements or recommendations by clients. If you do elect to allow or retain 1^st connection clients, you must remember that you are in control of the content on your LinkedIn page, and you are responsible for the publication of the endorsements you receive on your Linked In page. LinkedIn allows users to selectively “hide” endorsements received, and functionality recently introduced allows users to hide all endorsements.

How to Hide LinkedIn Endorsements

To hide ALL endorsements:

1. Click Profile at the top of your homepage.
2. Click Edit in the top section of your profile.
3. Scroll down to the Skills & Expertise section and click the blue pencil icon.
4. Click Display Your Endorsements?
5. Select No, do not show my endorsements.
6. Click Save.
7. Click Done editing in the top section of your profile.

To hide SELECTED endorsements:

1. Click Profile at the top of your homepage.
2. Click Edit in the top section of your profile.
3. Scroll down to the Skills & Expertise section and click the blue pencil icon.
4. Click the Manage Endorsements link.
5. Use the scroll bar on the left side of the box to view your list of skills.
6. Click on a skill to reveal the connections who have endorsed you for that skill.
7. Uncheck the box next to any people whose endorsements you want to hide. Or, check the box next to any you want to unhide.

Note: You may check or uncheck the box next to Show/Hide All Endorsements to take action on all endorsements under one skill at once.

1. Click Save.
2. Click Done editing in the top section of your profile.

If you don’t want a specific person to endorse you, you can remove the connection between the two of you. They will not be notified if you break the connection.

Adjusting LinkedIn Recommendations

A recommendation can be hidden but not deleted. To change the visibility of a recommendation on your profile:

1. Move your cursor over Profile at the top of your home page and click Recommendations.
2. Click the Manage link under the position with the recommendation you want to hide.
3. To the left of the recommender’s name, uncheck the box labeled Show.
4. Click Save Changes.

If you choose not to show a recommendation on your profile, it can still be viewed from a recommendations module on the right side of the recommender’s profile.

If you’re considering scrapping your LinkedIn, Facebook and other social media sites, this may be a good idea from a compliance perspective, but it may not be practical in the real world. Social media is becoming a prominent form of communication. Here are a few ways to help keep you and your web postings off the regulatory radar:

1 ) Check to see if your firm allows the use of social media for business purposes. If your firm does not have written policies and procedures governing the use of social media, your firm should develop such a written policy promptly, even if your firm, in practice, prohibits the use of social media. While some firms turn to existing policies and procedures — such as those that cover marketing, advertising, and/or electronic communications — to govern the use of social media by the firm’s advisory representatives, the SEC’s Office of Compliance Inspections and Examinations (OCIE) noted in  National Examination Risk Alert that these firms often have overlapping procedures that lack specificity and cause confusion when attempting to apply their policies to the use of social media.

2) Your firm has a regulatory obligation to maintain required books and records for electronic and client communications. The recordkeeping obligations of an investment adviser, regardless of whether the adviser is SEC or state registered, apply to postings made on social media sites. As the OCIE Risk Alert specifies, registered investment advisers that communicate through social media must retain records of these communications if they contain information that satisfies an investment adviser’s recordkeeping obligations under the Advisers Act.

3) Monitor your LinkedIn and other social media sites regularly. Remember that you are responsible for the content that appears on your personal and professional social media sites. Take control of this content to the best of your ability to avoid unintended consequences.

Conflicts of interest and fiduciary duty

The U.S. Securities and Exchange Commission’s stepped up pursuit of advisers who have conflicts of interest, investment advisers need to carefully scrutinize their practices. In a regulatory first, last fall the SEC obtained a $1.1 million settlement with a planner and two of his companies for failing to disclose to their clients a revenue sharing arrangement that gave the adviser a percentage of management fees received from a brokerage firm that managed the clients’ assets.

The advisory business is rife with conflicts of interest. First is the ongoing debate about “fiduciary duty,” which tends to focus on the assumed inability of registered brokers to put their clients’ interests ahead of a commission check. Next in line are registered advisers and adviser representatives. Because these advisers are connected in some way — by ownership, dual registration or otherwise— with a broker–dealer, there is the reverse observation that the advisers get to profit, both from adviser fees and from commissions on client trades

Intricacies of fiduciary duty

Registered investment advisers are in a “fiduciary” relationship with their clients and must never place their interests ahead of a client’s interests. Collecting fees on top of commissions creates a conflict of interest. Many advisers simply don’t charge commissions or net them out or reduce them against the fees. They also don’t obtain a third-party evaluation that the fees and commissions are fair and reasonable for the services rendered.

As advisers are learning in the post Dodd-Frank era of heightened scrutiny, to behave fairly and in accordance with legal fiduciary principles is not enough. In the Hicks case, the focus was not on economics or “double dipping,” but was on non-disclosure. In the SEC’s version of “fiduciary duty,” disclosure is as important (or possibly more important) than fair dealing. Advisers now must:

• disclose to clients and regulators on the record every real or imagined conflict that could possibly exist
• point out that these conflicts “create an incentive” for the adviser to violate fiduciary principles
• give clients a fair chance to study this and “opt out” of any situation involving a real or imagined conflict.

Behaving as a reasonable fiduciary is simply not enough. One must now go further and disclose each conflict.

Common conflicts of interest

The list below outlines common areas of “conflict” that the SEC now wants advisers to disclose to their clients in a timely manner. The list is largely drawn from the requirements of Form ADV Part 2A:

1. If you or any of your supervised persons accept compensation for the sale of securities or other investment products. Section 2(E).
2. If you have a relationship that is “material to your advisory business or to your clients that you or any of your management persons has” with a specified “related person” and if that relationship creates a “material conflict of interest with clients.” Section 10(C). (A “related person” is defined in the instructions as “Any advisory affiliate and any person that is under common control with your firm.” An “advisory affiliate” is defined as “all of your officers, partners, or directors (or any person performing similar functions); (2) all persons directly or indirectly controlling or controlled by you; and (3) all of your current employees (other than employees performing only clerical, administrative, support or similar functions).” There is no definition of a “material conflict of interest.” So you are left basically on your own as to what you should disclose.
3. If you recommend or select other investment advisers for your clients and you receive compensation directly or indirectly from them “that creates a material conflict of interest.” Section 10(D).
4. If you or a related person recommends to clients, or buys or sells from or to client accounts, securities in which you or a related person has a “material financial interest” (not defined). Section 11(B).
5. If you receive research or other “soft dollar” products or services (other than executions) from a broker-dealer or third party in connection with client transactions. Section 12(A)(1).
6. If you consider, when selecting a broker-dealer for a client, whether you receive client referrals from that broker-dealer. Section 12(A)(2).
7. If you routinely “recommend, request or require” that a client direct you to execute transactions through a specified broker-dealer (whether or not affiliated and whether or not you have a contract or any other relationship with that broker-dealer). Section 12(A)(3).
8. If a non-client provides you with “an award or some other economic benefit” for providing investment advice or other advisory services to your clients. Section 14(A).
9. If your clients can provide you with authority to vote their securities. Section 17(A).
10. If you or your IARS can trade in securities that you recommend to clients (FORM ADV-1, Ethics Instructions)

Advisers should think carefully about all their advisory relationships, considering not only whether they are fair to their clients but also how their actions might appear to an under-trained regulator.

Content Delivery by Investment Advisors

Delivering information electronically to advisory clients can be a competitive advantage for investment advisers. This practice, which the SEC has determined is allowable under federal securities laws, can streamline communication with clients and reduce paper use, resulting in savings. If you do decide to use electronic delivery, you need to follow specific practices to meet regulatory requirements.

Content presentation and delivery

Information delivered electronically should convey the same information as the paper documents, including the order of information. If a client who elects to receive information electronically requests a paper document, the client has a right to receive the information in paper form.

Access to information

Advisory clients who choose to receive information electronically from investment advisers should have easy access to the information and be able to retain the information or have ongoing access to the information for personal retention, no matter the electronic medium used. A client being able to download or print information delivered electronically allows the client to retain a personal record.

Adequate notice

Advisory clients must have adequate notice that electronic information is available. If information is made available electronically through a passive delivery system, such as on an Internet website, separate notice of the information’s availability may be needed to satisfy delivery requirements.

Evidence of delivery

Investment advisers may be able to satisfy having evidence of delivery by:

• obtaining the advisory client’s informed consent to delivery through a specified electronic medium and ensuring the client has appropriate notice and access.
• obtaining evidence that the advisory client received the information, such as an electronic mail return-receipt or confirmation that information was accessed, downloaded or printed.
• disseminating information through facsimile methods.

Informed consent

Informed consent should specify the electronic medium through which the information will be delivered, the period covered, and the information to be delivered. Advisory client consent may be made by manual signature or electronically. The investment adviser should inform the client of potential costs associated with electronic delivery, such as online charges.

Privacy and security

Investment advisers delivering information electronically should take reasonable precautions and establish policies and procedures to ensure the integrity, confidentiality and security of the information from tampering or alteration. To help maintain the confidentiality and security of personal financial information, the advisory client should be notified that the information will be delivered electronically.

Oversight

Investment advisers should establish procedures to ensure delivery obligations are satisfied and must supervise firm personnel to prevent violations. Systems and procedures should be established to deter or detect misconduct in the delivery of information, electronically or in hard copy. 

We hope that this article has helped you to understand the potential conflicts of interest social media man have on the investment advisor and the representatives.

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 The Securities Institute of America