Protecting Your Practice. Vessenes Katherine

ATTENTION CORPORATIONS

      THIS BOOK IS AVAILABLE for bulk purchase at special discount. Special editions or chapter reprints can also be customized to specifications. For information, please e-mail Bloomberg Press, [email protected], Attention: Director of Special Markets, or phone [phone].

      © 1997 by Katherine Vessenes, JD, CFP. All rights reserved. Protected under the Berne Convention. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews. For information, please write: Permissions Department, Bloomberg Press, 731 Lexington Avenue, New York, NY, 10022, or send an e-mail to [email protected].

      BLOOMBERG, BLOOMBERG LEGAL, BLOOMBERG MARKETS, BLOOMBERG NEWS, BLOOMBERG PRESS, BLOOMBERG PROFESSIONAL, BLOOMBERG RADIO, BLOOMBERG TELEVISION, BLOOMBERG TERMINAL and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg L.P. All rights reserved.EVISION, BLOOMBERG TERMINAL and BLOOMBERG TRADEBOOK are trademarks and service marks of Bloomberg L.P. All rights reserved.

      This publication contains the author’s opinions and is designed to provide accurate and authoritative information. It is sold with the understanding that the author, publisher, and Bloomberg L.P. are not engaged in rendering legal, accounting, investment-planning, or other professional advice. The reader should seek the services of a qualified professional for such advice; the author, publisher, and Bloomberg L.P. cannot be held responsible for any loss incurred as a result of specific investments or recommendations made by the reader.

      Vessenes, Katherine

      Includes index.

      ISBN 1-57660-053-X (alk. paper)

      1. Financial planners- Legal status, laws, etc. – United States-Popular works. 2. Financial planners- Malpractice- United States-Popular works. I. Title. II. Series.

      KF2921.Z9V473 1997

      332.6’068 – dc21 97-25544

      CIP

      Permissions credits on page 472.

This book isdedicated to theCreator of Truthand Integrity– K. V

      Acknowledgments

      THIS BOOK WOULD NOT have been possible without the help of many generous people. I am especially grateful to Laurie Grover, Todd Wilson, Carey J. Gifford, Robin L. Bellinson, Dale E. Brown, Barbara Diez, Jared Kieling, Patricia A. Taylor, Priscilla Treadwell, and my review committee: Ed Morrow, John McGovern, Dennis Kaminski, Nancy Johnson, John Simmers, Janet McCallen, and Rick Young. The following people kindly allowed us to include copies of their forms and documents: Arnie Abens, Alexandra Armstrong, J. Floyd Swilley, Nancy Johnson, Ed Morrow, Fred Haiker, Richard Young, Linda Lubitz, Norman Boone, and Lawrence J. Rybka.

      Without the unselfish support of my husband, Peter, and my children, Peter, Ted, and Sarah, I could never have completed this manuscript. To all of you, my most heartfelt thanks.

      INTRODUCTION

PROTECTING YOUR PRACTICE

      NOTHING HIDES SIN like a bull market.

      When stock prices are soaring, the last thing on most clients’ minds is regulation violations. In a prolonged bear market, however, even your favorite clients may be phoning you from their attorneys’ office.

      When I first started in the business, my mentor taught me to do certain things that were actually felonies. He was not trying to make me a criminal. He was just handing on to me the same overzealous sales practices that had made him a lot of money. In the years since then, the field has become so competitive and complex that even experienced financial professionals will find new things in this book to improve their practice and keep them out of trouble.

      The first step in building a successful practice is knowing what business you are in. Forty years ago, proprietors of drive-in restaurants thought they were in the hamburger business. McDonald’s Corp. founder Ray Kroc understood something his competition did not: he was really in the speed and clean-restroom business. That knowledge made him a billionaire.

      You need to know what kind of business you are in. What is really motivating clients to seek your advice?

      Believe it or not, we are in the peace-of-mind business. Whenever I lecture on choosing an adviser, an investment, or even a broker-dealer, I counsel the audience to first look at the character of the people at the top. If people of good character are running the operation, they will work hard to save even the worst deal. On the other hand, leaders with poor character at the helm can destroy even the best deal.

      Character is critical. Trusting a financial adviser to behave ethically when no one is looking is the single most important factor on a consumer’s mind. Clients are begging for someone they can trust. We can build that good faith and reliance by showing them that our integrity is beyond reproach.

      I believe in doing what is right by the client. I believe this not just to appease regulators and avoid lawsuits but also because it builds business.

      This book is about the “how” of doing the right thing.

      K. V .

      KNOWING THE ALPHABET

      THE FINANCIAL SERVICES industry has more than its fair share of acronyms. To make this book as user-friendly as possible, it was decided to include all widely used acronyms in this front material. These acronyms are presented below in alphabetical order. Whenever you see an acronym in the text and are not sure what it stands for or means, just refer to this listing for a brief definition.

      In general, acronyms specific to one subject matter and appearing in only one chapter are not included here. Thus, ADR or Alternative Dispute Resolution is not listed below as it is described solely in Chapter 18. However, both ADR and Alternative Dispute Resolution appear as entries in the Index.

       AICPA (AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS) Based in New York City, AICPA has 328,000 members throughout the country. Although only 1,650 accountants have earned its PFS designation, the Personal Financial Planning Membership Section of AICPA has 7,000 members. 1

      CFA (CHARTERED FINANCIAL ANALYST) This designation, awarded by the Association for Investment Management and Research, is described in Chapter 4.

       CFP (CERTIFIED FINANCIAL PLANNER) The CFP and Certified Financial Planner designations are two separate federally registered service marks, which are for the use of individuals who have completed the requirements established by the CFP Board. Approximately 31,500 people are currently licensed to use the CFP mark.2 This is discussed in Chapter 5.

       CFP BOARD (CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC.) This is a private, not-for-profit, professional regulatory organization which sets standards for CFP credentials, including education, examination, work experience, and ethics. 3 These standards are discussed in Chapter 5.

       ChFC (CHARTERED FINANCIAL CONSULTANT) This educational designation, described in Chapter 5, is granted by The American College, Bryn Mawr, Pennsylvania. The American College was founded to serve the life insurance industry by the American Society of CLU and ChFC, a national association for life insurance and financial services professionals also headquartered in Bryn Mawr. Approximately 15,300 members of the society have been awarded the ChFC designation. 4

       CLU (CHARTERED LIFE UNDERWRITER) This educational designation, described in Chapter 5, is granted by The American College, Bryn Mawr, Pennsylvania. The American College was founded to serve the life insurance industry by the American Society of CLU and ChFC, a national association for life insurance and financial services

1

Phyllis Bernstein, Personal Financial Planning Director, AICPA, supplied the information contained in this section.

2

Dick Young, General Counsel, CFP Board of Standards, supplied the information contained in this section.

3

Ibid.

4

Susan Farmer, Public Relations, American Society of CLU and ChFC, supplied the information contained in this section.