"One of the takeaways is almost every exam report has a deficiency in disclosure and conflicts of interest," said
In remarks at the
Advisors' relationships with affiliated brokerage practices, is one of those areas, Kahl said. For example,
"A common theme is it wasn't effective disclosure. There were numerous citations for identifying the conflict of affiliated brokers, but not telling your clients what that meant, allowing them to assess the conflict," Kahl said. "It's not just the disclosure of the conflict, but provide enough information to the client so in essence they're effectively consenting to the conflict."
Similarly, Kahl said that examiners had dinged advisors for multiple failures to disclose conflicts about their dealings with other service providers.
In some cases, conflicts arose from advisory staff holding an ownership stake in the provider. In others, the firm failed to disclose gifts or services provided to advisory staff, such as "lavish dinners" or travel on a private jet, according to Kahl.
"If it's going to color the choice of the service provider, think about how you address that in your compliance program," he said. "If you're going to allow your personnel to engage in those types of practices, think about telling your clients that that's going to happen and the potential impacts of that conflict of interest."
‘DISGUISED REFERRAL FEES’
He also warned about "disguised referral fees" that come from "quid pro quo" arrangements with lawyers, accountants or other service providers. Often, he said, examiners uncovered instances when advisors would recommend to clients the same professionals who had previously sent business their way — an off-the-books agreement that still warrants disclosures.
"It comes down to disclose what your trade error policy is, and make sure you follow it," he said. "That is a common exam deficiency: you said to your clients you were going to do X, and you did Y."
Kahl and other compliance experts speaking at the conference acknowledged that disclosure is not a panacea, and that indeed some conflicts are so glaring that they simply cannot be disclosed away. But he also acknowledged that conflicts are inherent in the typical advisor practice, and are not in and of themselves a problem. Where many advisors fall down, however, is that they turn a blind eye to practices that the
"There are conflicts continually. How do you address them? OCIE is going to come and kick the tires and then make sure that you … have a strong compliance program, and if there are conflicts, you're disclosing them, and you're disclosing them in a fulsome manner," Kahl said.
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