The Seven Critical Functions and Tasks That Your Financial Adviser Must Perform

nvestors should know that their financial advisers are expected to perform many important functions and tasks. These standards of care were articulated in 1995 when the Securities and Exchange Commission (SEC) approved rules proposed by the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) to modify the qualification examination that financial advisers (registered representatives) must pass to become licensed to sell securities. In approving the NYSE's and the NASD's proposed rules, the SEC stated that modifications would "ensure an appropriate level of expertise."

Let's examine the seven critical functions and tasks:

1. Seeks business for the broker-dealer through customers and potential customers
This function is self-explanatory.

2. Evaluates customers in terms of financial needs, current holdings, and available investment capital, and helps them identify their investment objectives
This function is critical because financial advisers are expected to know their customers' needs and objectives.

3. Provides customers and prospective customers with information on investments and makes suitable recommendations
This task involves describing the risks and rewards of various investments, investigating alternative investments for the customer, considering tax implications, recommending only suitable investments, and providing pertinent information regarding costs and fees.

4. Opens, transfers and closes customer accounts and maintains appropriate account records
Among other things, this function requires the financial adviser to retain copies of all correspondence, to update the customer's account records, and to execute appropriate customer requests.

5. Explains the organization, participants, and functions of the various securities markets and the principal factors that affect them
Financial advisers must counsel customers as to such things as the securities markets, economic news, and global events.

6. Obtains and verifies the customer's purchases and sales instructions, enters orders, and follows up on completion of transactions
This task involves explaining the basic types of orders and how they relate to the customer's objectives. This also requires a financial adviser to complete an order ticket for a purchase or sale in accordance with the customer's instructions, as well as to verify an order with the customer prior to entry.

7. Monitors the customer's portfolio and makes recommendations consistent with changes in economic and financial conditions as well as the customer's needs and objectives
This function is most important, and states two critical subparts. The first critical subpart is that a financial adviser "routinely reviews the customer's account to ensure that the investments continue to be suitable." This sets forth a duty to monitor, beyond simply executing the initial purchase of an investment. Although the legal departments at brokerage firms struggle to define the roles and responsibilities of their financial advisers as narrowly as possible, this language reflects an expansive view of the financial adviser's role and responsibilities.

Moreover, this language truly mirrors how brokerage firms promote their services to the public. For examples, consider the recent advertisements of three firms, Merrill Lynch, Prudential Financial and A.G. Edwards. In its latest "Total Merrill" ad campaign, under the category "Tracking Progress", the question is asked, "Do you have a financial advisor who helps you set definite goals and provide regular reviews?" Likewise, Prudential Financial boasts to prospective customers that, through "periodic portfolio reviews" with its Financial Advisors, there will be "frequent contact", such that customers "can keep aware of the market and your position, anticipate when changes are necessary, and make the right adjustments at the right time." And A.G. Edwards writes that its "financial consultants know where to turn to get informed investment recommendations and the latest financial planning techniques to make sure your plan continues to meet your needs."

The second critical subpart of this section provides that the financial adviser "suggests to the customer which securities to acquire, liquidate, hold or hedge." This requirement to suggest hedging (or ways to protect a portfolio against risk of loss, for example through stop loss orders, collars, pre-paid forward contracts and other devices) is critically important with concentrated positions in stocks, such as upon the exercise of employee stock options.

In conclusion, remember these seven critical functions and tasks. This is the level of service that investors deserve.

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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat & Filipowski and can be reached at 312-621-4400.