If investment advisory services were a cell phone plan, “accommodation accounts” would be the friends and family network. Typically, these accounts are made available to family members of the firm’s most important clients as well as close friends or even advisory staff members’ favorite charities. Often, the firm agrees to “help” with the account by looking it over, making a few recommendations and answering questions from time to time.
Because these accounts are being charged substantially lower fees than other clients (if they are being charged at all), the advisor is reluctant to make available the full suite of systems and processes furnished to other clients. Soon, these accounts drop off the advisor’s radar and sit quietly.
In other instances, these account holders simply want to consolidate all their assets with a single custodian or use the advisor’s reporting platform to aggregate their accounts. But too often, these accounts remain self-traded. The advisory firm agrees to implement client-directed trades and assist with basic account servicing needs, but doesn’t offer any securities advice.
But it’s important to remember, as Clare Boothe Luce said, “No good deed goes unpunished.” Danger looms on the horizon when you take on these accounts. The accommodated clients either quickly forget, or were never aware, of the significant limitations on the services available to them. And the potential risks to the advisory—heightened regulatory scrutiny, increased liability and conceivable damage to its overall reputation and goodwill—may not be worth the accommodation.
The danger is that advisors will tend to dismiss responsibility by saying, “It’s just an accommodation account.” And because they know the clients so well, they will likely do a terrible job setting expectations about the service they intend to provide. Since the fees are reduced or nonexistent, if there is a client agreement in place, it is often the wrong agreement. It could make the advisor responsible for delivering a full array of services.
And yet the account exists outside the firm’s established business processes, scheduled reviews, communications schedules and so on. It’s an unexploded landmine for the firm—waiting for a sudden market downturn or a financially troubled advisor’s bad judgment to open his firm up to legal action or, at the very least, a very uncomfortable Thanksgiving dinner.
The Best Laid Plans …
When fraud occurs in independent investment advisory firms, rarely is it a case of large-scale, systemic and willful deceit, such as a Ponzi scheme. Far more often, it’s an individual saddled with financial problems, somebody who, in a desperate attempt to stave off personal ruin, makes the inexcusable decision to skim money from one or more accounts. The fateful rationale has become cliché: “It’s only temporary; I’ll put the money back before anyone ever notices.”
And a tempting source of plunder is the accommodation account. There’s an obvious underlying reason that someone would be inclined to steal from friends and family rather than relative strangers: The firm has already been lax with such accounts and hasn’t put the usual protections in place; after all, it’s merely accommodation. The firm naturally assumes that its individual advisors would be exceedingly honest and diligent when dealing with their own family members—Uncle Jimmy—or a church group.
In the end, however, the client doesn’t just belong to the individual financial advisor. He or she is a bona fide client of the firm. And the acts of one advisor, no matter how close he is to the client, affect the entire firm.
Safer Doesn’t Mean Less Accommodating
The simple solution would be to prohibit accommodation accounts. But that’s impractical. In the real world, these types of accounts are essential. They can serve as an all-important bridge to the next client generation, establishing critical foundations for future relationships with those who will inherit your current clients’ wealth.
So how should you go about providing this “client accommodation” without exposing your firm to the risk of client dissatisfaction, or worse, litigation? It’s a matter of business discipline. Easier said than done, I know.
First and foremost, “protections” should be standard with all accounts, whether they are accommodation accounts or full-paying ones. It follows that all accounts should have similar (note: not the same) agreements in place with a consistent set of standard contractual provisions. It makes managing the firm’s contracts, well, more manageable.
There should also be different service levels. That’s right. Even though these are accommodation accounts, they need to be tiered so the firm can attach an appropriate communication, review and reporting schedule, as well as the appropriate business processes.
Time and time again, however, we come across advisors who hate implementing even basic letter agreements for fear of offending a family member or close friend. An advisor should simply explain in this case that his firm requires agreements for every client account so that there are no unreasonable expectations.
If that doesn’t work, blame the SEC, roll your eyes and mumble something about the chief compliance officer. Or fall back on the perennial favorite, “the damn lawyers.”
Trust, But Verify
Even with an agreement in place, firms can’t let their advisors service accommodation accounts unsupervised. It doesn’t matter if the accounts aren’t profitable to the firm. The advisor’s temptation to commit fraud or simply neglect a failing account is always there. If a firm is going to allow such accounts, they must be subject to the firm’s contractual standards, its regulatory compliance program, supervisory systems and business processes. In other words, there’s an inherent cost to carry these accounts, regardless of what fee the advisor is charging.
The cost of a slipup in these accounts isn’t limited to monetary damages—your firm’s reputation, goodwill, regulatory record, nexus to future assets and productivity can all be irreparably harmed. If they are properly handled, though, accommodation accounts can add assets (though they cannot be considered as part of your AUM). They can also get you positive public relations and win you grateful employees who feel empowered to help their communities and loved ones. That’s the point where we can finally look on these accounts as “deluxe accommodations.”
Brian Hamburger, JD, CRCP, AIFA, is the founder and managing director of MarketCounsel, the leading business and regulatory compliance consulting firm to the country’s pre-eminent entrepreneurial investment advisors. He is also the founder and managing member of the Hamburger Law Firm.