In both of these cases, regulatory agencies should have spotted trouble. The NASD (now FINRA) had looked at Stanford’s operations multiple times since 2004. They basically slapped Stanford’s hand. After employees alerted the authority of possible Ponzi-like dealings at the firm in 2006, the SEC discovered that one of its offices in Texas had suspected such since 1997.
Becerril was still running an operation as a financial advisor in 2012 despite the fact that his registration with FINRA had not been current since 2009.
Out of all this has come the Dodd-Frank legislation. It points to the never mentioned fact that the risk levels investors have faced over the past decade lay primarily in areas other than the capital markets. These are areas investors are ill equipped to assess. Capital markets risk is the most obvious. Ironically in many cases, it is the least threatening.
With the regulatory landscape currently in flux, advisors have an opportunity to differentiate themselves by educating clients and becoming their most trusted ally.
Stanford, Becerril, and Madoff are highly publicized, most egregious cases. They certainly are not the only instances. Trust-level differentiation is an opportunity to educate clients on conducting their own due diligence. They need to be educated on what they should look for in an advisor. They need to be pointed to sources to find the right information. And the first place they should start is with you.
This means reexamining your practice. It means measuring yourself against the standards—officially adopted or not—investors should be applying to you. It means becoming the kind of advisor investors clamor for but rarely find.
The first question to ask is, “If I were an investor, what would I look for in an advisor?” Since you are an ‘insider,’ it should be pretty easy for you to come up with a list of criteria. This list should include basic things which tend to be taken for granted. Things such as registrations, licenses held, capitalization of your firm, your reporting process, where to check for violations of securities laws, how often they should check these sources. You should also update them on the proposed regulatory changes. Some of these changes may cost your clients money because it will be costly for your firm to implement them.
The next step is to open a discussion as a firm about what these changes will mean to your clients and how to discuss them in a responsible way.
Step three is to open the conversation with your client. They may have heard of the Dodd-Frank legislation. They most certainly have heard of people like Madoff and Stanford. Although highly publicized, these cases were not narrowly contained. Action on Dodd-Frank has slowed, yet these matters are still very much in the forefront.
The SEC is looking at commentary it has received on various proposals. Only 20 percent of the 75 proposals made have actually been enacted. There are proposals ranging from a ban on proprietary trading at banks to discovering the origins of metals instigating violence in Africa. You can also talk about the proposed fiduciary standard and how your firm already acts on clients’ behalf.
You can position this conversation as an educational one. You can position yourself as a guide through what may be a confusing landscape for them. You can encourage your firm to provide educational programs on regulatory developments.
Especially if a proposed rule would affect the way your firm does business, you should be talking to your clients to get their input. In this way, you and your firm become advocates for your clients at a high level of trust. And we all know that giving clients what they need at a high level of trust is the very best way to get clients and keep them.


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