Wednesday, April 11, 2018

What’s in Your Files?


The importance of keeping a robust client file is well known to many financial professionals. However, what a “robust” file should look like may be less obvious. Different segments of our industry have different requirements and standards for what a producer should be doing and what is to be maintained in a client file.

The type of business you engage in, your licenses and registrations, as well as the states in which you conduct business can all impact what is required or expected. Investment adviser representatives not only have their own specific requirements for what files to maintain and what should be in each file, but they also have their own record retention requirements. Registered representatives also have SEC/FINRA regulations that dictate what should be kept and for how long, as well as any other requirements imposed by their broker/dealer. Insurance-only producers have historically relied on what the insurance carrier has required and any specific state requirements. So what if you are an insurance producer who is also an RR and IAR? Then you have to follow all the rules that pertain to you, even when it comes to maintaining files.
 

The Department of Labor fiduciary rule has added a new twist to the process and the outcome in that all producers, regardless of actual licenses and registrations, are fiduciaries and must comply with a prohibited transaction exemption in order to receive compensation when providing advice to qualified plans and IRAs. The Prohibited Transaction Exemption (PTE) 84-24, in particular, during the current transition period that now extends until July 1, 2019, requires producers to retain a copy of the written disclosure statement bearing the client’s acknowledgement and approval, as well as copies of any additional information or documents provided in connection with a recommendation. Under PTE 84-24, these records are required to be retained for six years from the date of the transaction that is based on the producer’s advice. (Note: There is no record retention requirement under the Best Interest Contract Exemption during the transition period because the Best Interest Contract and various written disclosures are not required.)
 

As a result, while there may not be as many specific client file requirements as mandated by FINRA/SEC, the producer must be able to demonstrate compliance with a prohibited transaction exemption, including how they satisfied impartial conduct standards. When engaging in qualified business (whether insurance or securities), producers need to show how they came to the decision to recommend a specific action regarding qualified funds. Showing how they came to their decision needs to be documented so that it can be presented when asked. Therefore, as an insurance-only producer, if you thought you didn’t need to have much in your client file other than the application and specific forms the insurance carrier requires, you might want to think again.
 

As we have been saying for a while now, the industry is moving more towards transparency in action and compensation. If a producer makes a recommendation, it is important that they take notes on what lead to that recommendation, even if the recommendation was to not make a change. Documenting each discussion with the client, the comparisons you did between different product types, and the research you did to arrive at your conclusion all help to justify your compensation and, if done right, your recommendation.
 

What documentation essentially means is that in addition to maintaining a copy of what the financial institution (broker/dealer or insurance carrier) may require, there should be notes and evidence of conversations, proposals, research, and comparisons. While the FI may not require that the support documentation be submitted to them, although some are  asking for it, it does not mean that you don’t need to have it. You should have a file for each client and that file should include all activity and documentation of discussions that help support the sale or recommendation. Even if that documentation never sees the light of day, you should have it. Also, do not forget about the written disclosure and client approval required under PTE 84-24 during the transition period.
 

All this talk of what you should put in your client file also begs the discussion of what you shouldn’t put in your client file. Simply said, don’t put things in client files that don’t belong there. The purpose of the client file is to support the recommendation and demonstrate the thought and discussion that went into a specific transaction/action. First, ensure that you are not commingling your files with cross-industry transactions: Keep fixed insurance documentation separate from your securities recommendations and/or advisory accounts. Also, do not put non-business related documentation or notes in the file. If you made a recommendation to your client and they did not like your recommendation or were less than gracious about it, keep your notes about the meeting factual and objective. Inappropriate language regarding client demeanor or appearance has no room in file notes. File notes are an extension of your business and should reflect a professional tone and contain information related to a specific recommendation.
 

So, we have old regulators and new regulation all wanting more documentation from the producer, and it seems like insurance regulators are now also interested and are asking for client file documentation from the producer rather than just requesting a copy of the application from the insurance carrier. Are you prepared for that?

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Ann Arbor Annuity Exchange and its representatives do not give tax or legal advice. Please consult your tax advisor or attorney.

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Designed for Financial Professionals.

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