Some of the earliest customer complaints rolling into Finra’s customer call center should send chills up and down the spines of advisors—and their compliance officers.

Mixed in with early reports of outright Covid-19 related fraud and what would be considered unsavory sales practices in any market are a smattering of early customer complaints about hold recommendations from their advisors.

In a few instances “investors complained about recommendations that investment professionals made, for example, to hold a position even as its value declined or a failure to follow instructions, like moving a client to a more conservative portfolio,” said Gerri Walsh, senior vice president of investor education at Finra.

“But our call centers have told me it is still early days and complaints of this nature may well take time to surface,” said Walsh, who spoke at a virtual SEC Investment Advisory Committee meeting.

“If history is any guide, the initiation of dispute resolution proceedings tends to follow periods of market volatility and market decline," she added.

Advisors and brokers should expect that once the height of the pandemic passes and life returns to normal, there’s going to be heavy scrutiny on how consumers were treated during the crisis, Maureen James, a partner in Summit Compliance Group LLC, said during a recent webinar for advisors sponsored by the National Association for Fixed Annuities (NAFA).

Many complaints may not even surface for a year or more, the consultant said. The complaint process tends to be long and it generally takes from one to three years from the time a product was sold for complaints to emerge,” James said.

“So just be aware if we get through these next three months and we don’t see complaints right out of the gate, it doesn’t mean it’s not coming. I’m not trying to [forecast] doomsday here, but you should expect that we are going to be scrutinized after the fact,” she warned.

That means sales and recommendations that may not have gotten a second look from clients or regulators in other times may come under far stricter scrutiny in the post-Covid world.

“Maybe you sold someone an investment and down the road they say, 'You know what? That wasn’t suitable,’ or ‘That client was encouraged to sell their assets at the very bottom. They sold lo.,’ We have to be extra diligent about what we’re doing, how we’re doing it and how we’re documenting it,” James said.

Advisors want to consider what it might look like in hindsight if they suggested that clients liquidate their 401(k)s at the bottom of market to purchase a product from the advisor, James added.

“If a regulator comes along later and wants to see all your recommendations to see if they’re suitable, they will look at trends. Did every client you met with get sold the same annuity at bottom of market? Regulators look for trends, not just individual transactions,” she warned.

It will be important that documentation can support an advisor's recommendations, showingg it was well thought out and based on long-term planning horizons.

Brokers and insurance agents are not allowed by law to provide rollover and investment advice unless they’re registered as investment advisors or reps, noted James.

She also warned advisors about using tactics that may be construed as fear-based selling. “There is a fine line between motivating someone to act and creating fear, and we need to respect that more than ever. Statements like 'the markets are going to make you destitute’ or ‘you’re going to end up on Medicaid after this’ are the types of things that will be heavily scrutinized later. We want to avoid scare tactics and exaggerated claims,” James said.

Words that will catch the attention of regulators and plaintiff attorney’ attention include "devastate," "decimate," "destroy" and "destitute," she said. Even the word “crisis” should be used in context of the virus only to avoid it being viewed as a scare tactic, she warned.

“We want to be really careful that people not being able to point back later to the fact that you used terminology to play on people’s fears so that they would buy something from you,” James said.

One-size-fits-all approaches can also catch up to advisors, especially if clients pay the highest commissions or fees. If regulators or attorneys see you’ve made the say same pitch again and again “you’ve really just helped them win their case against you,” James said.

“These risks are magnified right now,” added James, who also encouraged advisors to take a hard look at all of their advertising to ensure nothing rings false or incomplete in the new, virtual environment required by the pandemic. Even webinars can get risky if you’re used to providing them in person and aren’t using your typical handouts and white board, she said.

“Regulators will look at your advertising as advice and written documentation. It’s either going to help you or hurt you in most cases. We want to look at exactly what you’re are putting in writing and how you’re representing products to investors. .... If you’re pushing the envelope, even a little bit, it is time to pull back,” she added.

The consultant also warned advisors about disparaging other financial professionals. “Now is not the time to say, ‘The financial advisor who sold you that mutual fund had no idea what he was doing. That was not right for you.’ Not only is it not good business, it’s not legal to disparage other financial professionals and or products,” said James, who cited the potential for libel and slander charges.