Firms Weaponize Heightened Supervision to Shackle Big Producers

Advisors at big firms are increasingly finding themselves in the worst kind of limbo: heightened supervision. They don’t have the privileges of full-time employees, but they can’t leave. They’re living in a climate of fear and scrutiny that makes it incredibly difficult to run their business.

It’s becoming common as large firms in recent years have become more sensitive to risks and negative headlines and also concerned about issuing a wrongful termination. Their solution is to bench the advisor with administrative leave or place them under the microscope until they do have enough for a termination.

Once you’re called into a meeting with supervisors, it’s too late. That’s not to say that advisors need to be panicking, but top producers have to be prepared and considering their risks. Even seemingly minor infractions have become triggers for firms.

Having an assistant take a continuing education test or mismarking a trade may seem like administrative issues for a busy advisor, but those are just two examples of what can trigger heightened supervision. Advisors who are exploring other firms also need to be extra cautious because firms can characterize your printing activities or work you have taken home as theft of trade secrets or potential client privacy violations.

Once you’re on a supervision plan, the ramifications can be far-reaching. You’re essentially on parole within your own firm. A $15 million producer with 35 years of experience suddenly feels like a teenager reporting to a probation officer about daily activities and expenses. Compliance officers scrutinize everything from your T&E reports to your phone records.

Some advisors are even forced to take leaves of absence during investigations and sit at home wondering if their decades-long careers are about to end over a paperwork error. During this time period, which can last several months to a year, it’s nearly impossible to find a new job at a reputable firm.

This has real financial implications. What might have been a 400% deal becomes heavily back-end loaded, with recruiters offering perhaps 50% upfront instead of 200% cash.

Large producers concerned about losing clients need to have a plan. It is critical to minimize risks and consult with experts who can provide guidance, particularly if you’re the type that has run a practice with some loose ends over the years.

Of course, the only way to truly avoid this kind of scrutiny is to be independent. You still have regulatory oversight, but you don’t have firm oversight. That means outside business activities and selling away claims that are constantly tripping up big-firm brokers will not capsize your career.

If you’re staying, leverage the expertise of a seasoned recruiter and make sure you have independent legal representation. You need to know what your options are once you believe you are facing additional scrutiny. If you’re at risk of getting terminated, each day that you are unable to contact clients and waiting to land at a new firm can cost you customers. Even with the best planning you will have at least 31 days before release of your license to another firm. You cannot wait until the last minute to start the months-long process of establishing your own RIA.

A lawyer can guide you on what you can say to customers and help you emphasize to clients that you have acted in their best interests. Similarly, a seasoned recruiter can also help to open doors and explain your situation to a new firm or guide you toward various options. Perhaps your old firm takes mercy in crafting the U5 language, and you can land at another wirehouse. In some cases, you need to have second-tier options lined up to ensure continuity of care for your customers.

For some, the increased scrutiny becomes a blessing in disguise and terminated brokers have found themselves at firms that provide more flexibility and understanding than their former firm.

The irony is that most of these compliance infractions that have been leading to heightened supervision have nothing to do with FINRA or SEC regulations and everything to do with internal firm policies designed to maintain control. The firms have discovered that the threat of heightened supervision is more effective than golden handcuffs at keeping advisors in line.