FA Risk Management

Current Articles

Helpful, real world articles are just a small part of the management tools we design for individuals and small firms. FA Risk Management members benefit from unlimited access to an extensive library of materials and resources. 

It’s a trap!

BICE, the Best Investment Contract Exemption, is a trap.

Let’s examine this logically.

Who determines what is Best? Attorneys, courts, panels, regulators, compliance officers? With the aid of hindsight like so many past investments? Of course, that’s when the complaints come in − after they have failed. There is no discussion of what the world was like when the decision was made. There is no consideration for what has changed since then.

Best Investment: according to whom? Compared to what? When? Best on the platform? Best in the class? Has the firm or rep investigated all alternatives, including hedged positions, strategies, and channels?

Contract: Between the sponsor, the rep and the client? Between the rep/advisor and the client? Between the firm and the client?

Who gets the Exemption? The firm? The rep/advisor? The client? Regulation may make this about supervision or the actions of a rep. Litigation will make this about the firm (to get to the money) and the client. But no one knows the client like the rep/advisor. No one wants to help the client more than the rep/advisor.

As a proposed solution, BICE is unproven and lacking. There are just too many arbitrary possibilities and no real concrete standards.

But we have a suggestion. Instead of using BICE, use a Contract of Disclosure and Agreement. It would include the following in just one page:

  1. Disclosure of compensation of all parties and signed by rep;
  2. Acknowledgement and acceptance of risks and costs, signed by client;
  3. Declaration by client of desire to own asset;
  4. Acknowledge that my statement will report a significant discount from my purchase price and that the prices may not adequately reflect a liquidation price;
  5. Statement by client holding sponsor, firm and rep harmless from litigation, with exclusion of proven fraud.
  6. Precluding heirs from filing a claim in the event of untimely death of client.

The client will initial each statement, sign and date the form along with the rep/advisor signing and acknowledging discussing each item.

This will demonstrate client understanding and hold the firm, rep/advisor harmless for market events and sponsor mismanagement.

WARNING!!! None of this will help you if the client is not suitable, the amount is not appropriate, or the client doesn’t understand FULLY.
WARNING!!! None of this will help you if the client is not suitable, the amount is not appropriate, or the client doesn’t understand FULLY.
WARNING!!! None of this will help you if the client is not suitable, the amount is not appropriate, or the client doesn’t understand FULLY.

This is not a misprint. It has been repeated three times to make the point. The rep/advisor must determine that the client is sophisticated enough and have it documented; be able to bear the risk/loss/illiquidity; and fully acknowledge and agree to the above terms. If there is any doubt in YOUR mind, walk away and start again with something more common and less complex.

IT DOES NOT MATTER WHAT THE CLIENT SIGNS AND AGREES TO IF YOU CAN NOT DEMONSTRATE THEY FULLY UNDERSTAND AND TAKE THE LOSS!

What’s in Your Files?

FA Risk Management is a member organization providing education, counseling and financial support to registered professionals, improving the outcome and reducing the cost of client complaints.

Doug Schriner, President

www.faRiskManagement.com

doug@faRiskManagement.com

303/907-7347