How to Scale Goal-Based Advice While Satisfying Compliance Standards

Advisors face a common dilemma: managing assets to meet a client’s stated risk tolerance with full knowledge that other assets exist that are “held away”, which are defined as accounts not actively managed by an advisor or custodian affiliated with the advisor’s financial institution.

For example, suppose a client has placed $1 Million with an advisor to meet a future capital accumulation goal in 10 years, and is comfortable with only a moderate level of risk.

Given the time constraint, reaching the goal may be a stretch, unless the client either extends the time period or assumes more risk than is prudent. However, further suppose that the advisor is aware of an additional $1 million pool of client assets held away.

Theoretically, the risk tolerance on a combined portfolio of $2 Million could remain consistent with the client’s original risk tolerance, all things being equal, and the future capital goal could be achieved within the client’s stated time frame, given that there are more investible assets to work with.

However, FINRA 2111 (The ‘suitability’ rule) says the dually registered advisors, acting in a registered representative capacity with the  broker dealer must have a reasonable basis to believe that a transaction is suitable for a client, based, in part, on the client’s profile.  That profile may include other investments which may not be managed by the advisor.

Furthermore, those assets held away may directly affect the client’s overall risk tolerance, rather than only those assets under advisement. It can create a conundrum: how to access information pertaining to all assets (not just the ones under the advisor’s purview) to make prudent recommendations and adhere to the best interest of the client.

Click to learn how to Scale Goal-Base Advice While Satisfying Compliance Standards.