As one of the 267 Minnesota state-registered investment advisors, I am in a distinctive and special group of boutique planning shops. Like all of us, I am also required to fulfill my obligations in regards to compliance measures- or as one of our esteemed committee members defines it- we are to work in the business and work on our businesses.
One of those acts on business…. Is the annual Errors and Omissions insurance, which we -as financial planners- must carry. Last week I received my annual renewal questionnaire from my carrier- it started out like so many others I’ve had to fill out in the past. This one of course had the initial vetting questions that were restricted to Yes or No answers. [ie. Has any claim, complaint or proceeding been made against you or any other applicant proposed for this insurance?] Fortunately, I could answer “No” to that one and many others of the similar type. After a few of those, I started to notice there were more questions than there had been in years past- eight pages of them to be exact. The insurance carrier’s net was obviously being cast in a wider arc- but not only wider, but deeper too. And some questions seemed like a mile-long gill net that would catch just about anybody- “Has the applicant been involved in any actual or proposed merger, acquisition, consolidation, tender offer or divestment during the past three years or contemplating in the next 12 months? Yes/No” Whether you’re new to this business or a seasoned veteran- Who hasn’t contemplated this?
The newer questions made me pause; here are some of them: “Do you or any of your partners act as both trustee and advisor to any client?”, “Do you use a third-party solicitor to generate business?”, “Do you use an Investment Policy Statement for other than ERISA accounts?”, “Does your firm –in writing- require clients to review their statements at least quarterly?”, “Do you have a current Social Media policy?”, Do you have a whistleblower policy in a compliance manual and is it circulated and well-known amongst staff?” -How would you answer these?
The renewal application also instructed me –had I not done so already- to include with it: ADV Part I, ADV Part IIA, firm brochure, any and all respective supplements and my Trade Error Policy and Procedures. By page six, I was in full compliance battle mode and looked forward to filling in the 116th little check-box! (or fill-in-the-blank with AUM data regarding discretionary/non-discretionary, outside management, investment vehicles used, etc.). With the couple pages left to do, it dawned on me to think like the underwriter about to insure a state-registered Registered Investment Advisor (RIA). Here in Minnesota, there are about 267 RIAs and in the course of answering my E&O renewal questions, I was forced to think about working on my business instead of just in my business. Back in July of 2011, when all advisors with less than $100M were forced to go state-registered, it took many states by storm. Many –like Minnesota- had to ramp up for the mini onslaught of new responsibilities in administering the regulatory requirements of these 267 RIAs. The Department of Commerce has recently hired five new members to assist in the administration of us state-registered advisors –let me say that again for emphasis- five more administrators for the 267 RIAs…..and they have auditing responsibilities too. This equates to 1 auditor for every 54 RIAs; assuming one of these administrators can pay a visit to the office of an advisor -say, one per week- that implies within one year’s time frame we all would have the opportunity to have a conversation with one such Dept. of Commerce person. And this conversation would go something along the lines of: Dept. of Commerce person: “Do you have accessible and may I see your ADV Part I and Part II?” or “May I see a sample client contract?” or “Do you have a Social Media Policy?”. [Where have I seen these questions before?]
You can see from the writing on the wall, that it is only a matter of time before we are having such a conversation with someone from the Dept. of Commerce. So are you prepared for it? If you were an E&O insurance underwriter, would you insure you? The ‘yes’ answer comes from having a solid footing in your area of compliance……which is easily obtained and a do-able action by working on your business of being a state-registered RIA. Obtainable? Yes, here:
- go to the Minnesota Revisor of Statutes and search under statute numbers “80A”- this is a comprehensive guideline for working on your state-registered RIA business.
- next, look under the MN Administrator site for ‘2876- Securities Regulation and Regulations for Financial Advisers’ and read the sub-sets of 2876.4061, 4112, 4113, and so on.
Do you also offer insurance products?
- brush up on the Minnesota Admin Rule 2790- Insurance Marketing Standards [2790.0100-2790.2200]
I can already foresee grumblings of “I’m too busy…..I’ll do this tomorrow….” Look at the clock- take the next three minutes to read 2876.4114-Record Keeping Requirements. It should only take that- three minutes. Like the Nike ad says, “Just Do It”. Now that you’ve bitten off, chewed on and swallowed that little three minute read, open 2876.4114-Investment Advisor Brochure Rule and spend another three minutes reading that little piece. Three minutes a couple times a day and you’ll have eaten the whole elephant in no time. Remember, if you’re not working on your business, it won’t be very long that you’ll be in the business. Or think of Shel Silverstein’s poem:
All the Woulda-Coulda-Shouldas
Layin' in the sun,
Talkin' bout the things
They woulda-coulda-shoulda done...
But those Woulda-Coulda-Shouldas
All ran away and hid
From one little did.