New hire? Send them to compliance

By Vikram Barhat | May 13, 2010 | Last updated on May 13, 2010
4 min read

Adding new advisors to the team is always exciting. The prospect of additional business can tempt a dealer to rush through the paperwork, but signing them up without the approval of the compliance department could leave the firm with a ticking time bomb.

“When a new rep comes into the firm without due diligence done, it can find the dealer confronted with an MFDA investigation,” said Heather Phillips, vice-president, Armstrong and Quaile Associates, speaking at the Association of Canadian Compliance Professionals’ 9th Annual Compliance Forum.

“Very often, it can be avoided. To mitigate our risks, we really need to scrutinize advisors upfront and make a determination.”

Phillips brought into sharp focus the value of due diligence in hiring new advisors in a joint presentation titled Recruiting & Registration Best Practices.

The point was further pressed by Cheryl Hamilton, CCO, MGI Financial Inc., who made the other half of the presentation.

“The contracting doesn’t even get out the door until all of the compliance due diligence has been done,” said Hamilton. “Once compliance is satisfied, only then the retail sales people engage themselves to gauge the rep’s book.”

Phillips said the scrutiny has the potential to draw out issues that could help the dealer to make a better judgment on the prospective employee. These issues could include past compliance problems, client complaints, civil claims and investigations.

There are other ways to assess risks which should be taken into consideration as an important part of the recruitment process, said Phillips.

“When we go through the application process, we look at the practice overview,” she said. Looking at the list of all the products the rep is selling gives an indication of his or her business and its inherent risks. “If they are all mutual funds, (it’s) not bad. But if they are mutual funds and precious metals and the rest in the money market, you might have a problem,” said Phillips.

Looking into an advisor’s revenue stream goes a long way in evaluating their credibility, said Phillips. “Do they have outside business activities, do they have tax issues, and do they have referrals…the whole gamut,” she said.

Hamilton agrees. “You need to know what outside business activities they are engaged in and if they will take them offside if they are contracted with an MGA.”

The next step, said Hamilton, is getting to the bottom of their professional conduct and personal financial dealings. “From the risk perspective, you need to get down and understand what their conduct has been. Especially drilling down into the areas that are the most risk for the firm,” said Hamilton.

She added the MFDA has issued clear guidelines on personal financial dealings and on leverage; areas on which insurance reps are often caught offside. “Sometimes it’s innocent, sometimes not,” said Hamilton.

A close inspection of client complaints and regulatory issues is critical to the due diligence process, said Hamilton, “because often problems in the past are a good window onto their conduct in the future.” These types of patterns, she said, would be repeated and that raises the risk profile of bringing that person on.

“Any of the unresolved client complaints (are) going to come to the firm with the advisor,” said Hamilton.

She said it is also imperative to go deep into the quality of the documentation the advisor has on file. “If they have files that have absolutely nothing in them, (then) that is exactly what you are going to have when you’re trying to respond to the regulators and (in the case of) a civil action,” said Hamilton stressing that the quality of an advisor’s file directly equates with the quality of the advisor themselves.

Running a media search — a common practice adopted for recruitment purposes — can sometimes uncover a few surprises, said Phillips. “Go on a website, search their names, their trade name. Type in their phone number and see what comes up under that number,” she suggested.

Bankruptcies and garnishments are other things Hamilton looks at very closely. “We get into details of the reason behind them and make a determination from a risk perspective,” she said. If it’s just irresponsible behaviours on their part, then this is a significant risk to the firm, said Hamilton. “If they are having difficulty managing their own money, it becomes very difficult to handle others’.”

Hamilton insisted that a firm’s risk management exercise does not end with the recruitment process.

“Once the new rep comes into your firm, you’ve got to make sure they think like you, they understand your policies, and they have your philosophy.”

Hamilton said not to rely on the training advisors received at their previous job. “You don’t know what kind of training they have got at a previous firm. You have to make sure you train them in policies and risk management.”

She said there is no room for “I didn’t know”. “The phrase ‘ought to have known’ is often a straight line to regulatory and civil actions.”


Vikram Barhat