Market volatility has become more frequent — and more pronounced — than ever before in today’s financial landscape. From pandemic-induced crashes to geopolitical tensions causing wild swings, financial advisers find themselves increasingly navigating choppy waters while trying to maintain regulatory compliance.
During these uncertain periods, compliance obligations don't diminish—they actually become more critical.
This guide explores essential compliance considerations during market volatility, focusing on three key areas: identifying and managing client complaints, recognizing and addressing trade errors, and maintaining robust documentation of client interactions and investment decisions.
Understanding Client Complaints in Volatile Markets
When the market downturns, clients want to talk more. It makes sense — they’re experiencing the volatility too, and they’re likely going to have questions. However, not every question or concern necessarily constitutes a formal complaint. Being able to discern general inquiries from actual complaints is a crucial skill during volatile periods.
What Does NOT Constitute a Client Complaint:
• General questions about market conditions or portfolio performance
• Expressions of concern about market volatility
• Requests for reassurance or explanation about investment strategy
• Inquiries about rebalancing options or potential tactical adjustments
What DOES Constitute a Client Complaint:
• Explicit allegations of misconduct, negligence, or breach of fiduciary duty
• Claims that an adviser acted against instructions or outside the scope of authority
• Assertions of misrepresentation or failure to disclose material information
• Formal demands for compensation or corrective action
• Written expressions of dissatisfaction requiring a response
It’s okay that clients want to communicate more during market volatility, but be sure to maintain clear documentation of all client interactions and establish a consistent process for evaluating whether a communication rises to the level of a complaint requiring formal resolution and potential regulatory reporting.
Keep in mind that complaints left unaddressed or miscategorized can escalate into regulatory issues. Consider implementing a tiered response system where senior compliance staff review borderline cases to determine appropriate classification and response.
Trade Errors: Recognition and Resolution
Another thing market volatility brings to the table is increased trading activity — which, consequently, means a heightened risk of trade errors. Understanding what constitutes a trade error and having clear protocols for addressing them is essential for staying compliant during turbulent markets.
What Does NOT Constitute a Trade Error:
• Investment decisions that underperform due to market conditions
• Tactical allocations that don't achieve expected results
• Trading decisions made within the scope of discretionary authority that the client later questions
• Timing differences in trade execution due to market conditions (when best execution standards are still met)
What DOES Constitute a Trade Error:
• Purchases of incorrect securities
• Trades in wrong client accounts
• Order quantity mistakes
• Duplicate transactions
• Failure to execute trades as instructed
• Breaches of investment policy statements or client restrictions
• Transactions exceeding authorized discretion
When markets are volatile, pressure to act quickly can increase the likelihood of errors. (You know… sort of like how when you’re rushing out the door, you’re more likely to forget to turn the coffee pot off.)
Implement a systematic approach to trade error identification, documentation, and resolution. Here are some best practices:
1. Establish clear internal reporting requirements for potential errors
2. Document every step of the error investigation process
3. Calculate impacts using consistent methodologies
4. Keep an updated trade error log tracking identification, resolution, and remediation
5. Conduct periodic reviews to identify patterns requiring procedural improvements
Most importantly, ensure your firm has a consistent policy regarding who bears the cost of trade errors. Market volatility doesn't change your fundamental obligation to make clients whole when errors occur.
Documentation: Your Shield Against Compliance Risk
Thorough and comprehensive documentation is, above all else, the most important thing to have in volatile markets. It serves multiple purposes: demonstrating compliance, protecting the firm from unwarranted claims, and providing clarity when questions arise.
Investment Policy Statements: Your Foundation
The investment policy statement (IPS) should serve as the cornerstone of your client relationship. During volatile markets, review these documents to ensure they:
• Clearly articulate investment objectives and constraints
• Establish reasonable risk parameters and expectations
• Outline rebalancing methodologies and triggers
• Define benchmarks for evaluating performance
• Include provisions addressing market volatility scenarios
Consider using a systematic IPS review schedule, particularly after significant market events. This shows ongoing diligence in keeping alignment between client objectives and investment strategies.
Tracking Changes in Client Profiles
Client circumstances evolve constantly, often accelerated during economic uncertainty. Establish procedures for:
• Regular client profile updates (at minimum annually)
• Documenting material changes in financial situation, risk tolerance, or objectives
• Recording temporary vs. permanent changes in client circumstances
• Confirming that portfolio adjustments align with updated profiles
When market volatility triggers client concern, be sure to document whether expressed changes in risk tolerance appear emotional and temporary or represent genuine long-term shifts in objectives.
Documenting "Talk Them Off the Ledge" Conversations
Some of the most valuable services advisers provide during volatile markets involve preventing clients from making emotional decisions they might later regret. When clients request dramatic portfolio changes during market turbulence, your thorough record-keeping becomes your protection:
1. Record the specific client request (date, time, specific changes requested)
2. Document your explanation of potential consequences of the requested changes
3. Note alternative recommendations provided
4. Clearly state the final decision and rationale
5. Follow up with written confirmation of the conversation and decisions
These records protect both parties: clients from potentially harmful impulsive decisions and advisers from claims that they failed to follow instructions.
Implementing Best Practices
Using these approaches may strengthen your documentation framework:
• Use standardized templates for common client interactions during volatile periods
• Implement a simultaneous note-taking system for all substantive client discussions
• Establish clear escalation protocols for compliance review of certain client requests
• Create a centralized place to keep all client communication during market stress events
• Conduct periodic compliance reviews of documentation quality and completeness
Conclusion: Turning Compliance into a Competitive Advantage
While market volatility creates compliance challenges, firms that excel in these areas transform compliance excellence into a competitive advantage. Clear complaint identification procedures, robust trade error protocols, and comprehensive documentation practices don't just mitigate regulatory risk—they build client trust.
During periods of market stress, clients value advisers who show professionalism through organized, transparent processes. By establishing clear frameworks for managing these compliance aspects, you create an environment where clients can confidently navigate market uncertainty with you as their trusted guide.
Regulators understand market volatility creates challenges. Their biggest concern isn't whether market movements negatively impacted portfolios, but rather whether advisers kept up compliance with established procedures, fulfilled fiduciary obligations, and properly documented their actions throughout turbulent periods.
By focusing on these compliance considerations during volatile markets, advisory firms can weather regulatory scrutiny while also strengthening client relationships—positioning themselves for sustainable success regardless of market conditions.
These materials have not been reviewed or approved by any regulatory agency, and represent solely the interpretative opinions of Synergy Compliance Education (“Synergy”). To the fullest extent permissible pursuant to applicable laws, Synergy disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. In no event shall Synergy have any liability for damages, losses, and causes of action for accessing these materials.