Reputational Risk Management: Protecting Your Firm

Reputation is important. Especially when you’re in the business of managing people’s money.

You’re managing someone’s life savings. Their legacy. Their children’s inheritance.

When you have to settle charges with a regulator and pay fines, those become publicly disclosed items.

When a client files an arbitration or litigation, that becomes publicly disclosed.

These things become public because regulators believe that investors should be informed when deciding whether or not to do business with a financial advisor… and they’re not wrong.

There are even more challenges with this because advisers are also required to disclose liens, negotiations of debt, and criminal convictions.

They don’t ever come off their public record. Who wants an advisor who can’t manage their own money or has been convicted of a crime?

But then again, things change. People grow.

There are advisers over 50 years old who are still disclosing their petty theft charges from their early 20s. Others who had to compromise debt back in the 2008-2010 economic downturn are still required to disclose these events. That’s not helping anyone.

Should we really be holding these mistakes against them and require them to disclose them in perpetuity?

Regulators have not made it easy for financial advisers, and they are often unforgiving when it comes to old disclosures.

So the stakes are high to ensure that advisers run a clean business and CYA (cover your ass) so they don’t end up with disclosures that can’t be or are expensive and difficult to remove.

Understanding Reputational Risk

Reputational risk refers to the potential loss an advisor may face due to negative perceptions held by clients, regulators, or the public. In the financial advisory world, where trust is paramount, reputational risk can have far-reaching consequences.

Several factors contribute to reputational risk for financial advisors:

• Regulatory Fines: When advisors face fines or sanctions from regulatory bodies, these actions become public knowledge. Such disclosures can severely impact client trust. For instance, the SEC has recently highlighted shortcomings in compliance among new advisors, underscoring how easily one misstep can spiral into reputational damage.
• Client Complaints: Even unfounded complaints can harm an advisor’s reputation. If a client files a complaint—regardless of its resolution—this information is often publicly disclosed. The mere existence of a complaint can raise red flags for prospective clients, making them hesitant to engage your services.
• Past Disclosures: Advisors are required to disclose a range of events that could negatively affect their reputation, including liens, debt negotiations, and criminal convictions. These disclosures linger indefinitely and can lead clients to question an advisor’s ability to manage their own finances, let alone their clients’ assets.

As the landscape of financial advising continues to evolve, understanding and mitigating risk is essential for maintaining a successful practice.

The Consequences of Poor Reputation

Public Disclosures

When advisors face regulatory fines or settle client disputes, these outcomes are publicly disclosed. This transparency, intended to protect investors, can severely damage an advisor’s reputation. Potential clients often shy away from advisors with negative marks on their record, leading to lost business and diminished trust.

Long-term Implications

Poor reputation has lasting effects. Advisors must disclose past issues like liens or debt negotiations, and these records stick around indefinitely. A financial struggle during the 2008-2010 downturn or a youthful mistake can haunt an advisor for years.

The question remains: should past errors define an advisor forever? These lingering disclosures can deter clients, making it crucial for advisors to manage reputational risk proactively—not just by avoiding new issues, but by addressing the impact of old infractions as well.

The Challenge with Expunging Disclosures

The expungement process allows financial advisors to seek the removal of certain disclosures from their records, but it has become increasingly complex. Advisors typically initiate this process through arbitration, aiming to clear their names of unfounded complaints or regulatory actions. However, recent changes to expungement rules have made this task significantly more challenging.

Recent Changes

• Tighter Timeframes: Advisors now have only 2-3 years after a complaint or arbitration to request expungement, disqualifying many older cases that could have previously been addressed.
• Panel Composition: Expungement requests must now be heard by a three-member panel rather than a single arbitrator, and all members must unanimously agree to grant expungement. This change increases the difficulty of achieving a favorable outcome.
• Increased Scrutiny: State regulators are now notified of expungement proceedings and can participate, adding another layer of complexity and potential opposition to the process.
• Higher Costs: The financial burden has also increased, with advisors facing significant fees to pursue expungement, even if they represent themselves.

Emotional and Financial Toll

The emotional impact of seeking expungement can be significant. Advisors often grapple with stress from public disclosures and the fear of lasting reputational damage, feeling trapped by past mistakes that don’t reflect their current character.

Financially, pursuing a FINRA expungement can be daunting. Advisors face substantial costs for legal representation and arbitration fees, which can quickly add up. This financial burden, alongside the risk of losing clients due to negative disclosures, creates a tough environment for advisors working to restore their reputations.

In short, while expungement offers a chance to clear one’s record, recent changes have made the process increasingly challenging and costly for many advisors.

Safeguard Your Reputation. Build Trust.

Proactive Measures

To maintain a clean business and safeguard your reputation, consider these proactive compliance strategies:

• Engage Experts: Partner with an outsourced compliance department to enhance your compliance efforts and navigate regulatory complexities.
• Implement Policies: Establish clear written policies to outline compliance obligations and foster accountability.
• Regular Training: Conduct ongoing training for your team to keep everyone updated on compliance and ethical practices.
• Monitor and Review: Continuously monitor compliance controls and review policies to prevent issues before they arise.

Importance of Transparency and Ethical Practices

Transparency builds client trust. By openly communicating your compliance efforts and addressing any issues, you reinforce your commitment to ethical practices. This approach strengthens client relationships and will benefit your firm’s reputation.

Don’t Take the Reputational Risk—Protect Your Firm

Your reputation is everything in the financial advisory world. It’s what builds trust with your clients and keeps your business thriving. Protecting that reputation should always be a top priority.

I encourage all advisors to take proactive steps to manage reputational risk. Invest in solid compliance practices, stay transparent, and don’t hesitate to reach out to My RIA Lawyer for help.

If you’re feeling uncertain about compliance or need guidance on the expungement process, contact us!