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Outside Business Activities (OBAs) are more than just side hustles for financial advisors – they’re ethical minefields that have drawn increasing scrutiny from regulatory bodies like FINRA. Since intensifying its focus in 2018, FINRA has highlighted the importance of transparency and adherence to compliance in these endeavors in its most recent report.
Advisors often initiate OBAs with the best intentions, envisioning them as harmless ventures. However, without rigorous ethical oversight, these activities can spiral into conflicts of interest, endangering both professional relationships and reputations. For financial advisors, a deep understanding of the ethical dimensions of OBAs is not just beneficial – it’s essential to maintaining the trust and transparency that underpin their practices.
Identifying potential conflicts of interest
The primary ethical challenge in managing OBAs is recognizing potential conflicts of interest. As custodians of sensitive information and trusted parties, advisors must evaluate any external activity to ensure that it does not compromise their obligations to their clients or their primary employer. For example, an educational consultancy started as a side business by an advisor became problematic when one of its clients considered investing with the advisor’s primary firm. This led to a complex situation where the advisor’s dual roles conflicted.
Disclosure requirements for OBA compliance
Transparency in disclosing OBAs is not only a best practice but often a regulatory requirement. Advisors must report their external business activities to their employers and sometimes to regulatory bodies. This helps firms manage potential risks associated with their advisors’ engagements outside of work. Regular updates are crucial as the business evolves to avoid compliance issues that could have been mitigated with timely disclosures.
Additionally, advisors managing dual roles must do so responsibly by maintaining clear boundaries between their primary job and their side activities. This involves not only adhering to compliance standards but also ensuring that the side business does not encroach on their primary responsibilities. For example, an advisor may find it challenging to separate their roles when they use company resources for a consultancy business, blurring ethical lines. Setting and respecting clear boundaries is essential for responsibly managing dual roles.
