Compliance Monkey
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Steele was a sales assistant working with two independent advisors serving 50 clients with $50 million in assets under management. Not only was she suffering from strep throat, Steele recalls, but the compliance files were mostly — how should we put this — nonexistent. And what was there was disorganized — it was mixed in with files from other parts of the business. The compliance auditor scoured the firm's files for two days and afterwards her firm received a three-page letter that described, item by item, what needed work. A re-audit was scheduled for three months later. Steele was resolved to turn things around, but she knew she'd have to roll up her shirtsleeves.
“When I first arrived here, there was an adversarial relationship between the advisors and compliance,” says Steele, who is a client relations manager at Ouellette Wealth Management Group, an affiliate of LPL Financial, in Lexington, Mass. Like most advisors, Steele's reps considered compliance a necessary evil, and disliked spending a great deal of time on it: They felt that filling out all the necessary forms took them away from serving existing and prospective clients. After that audit in 2000, however, Steele says the entire office realized that they had to put compliance at the top of their list. (Ultimately, the office did manage to address the auditor's concerns, and they were not subject to a fine or punishment.)
Ah, the good old days — back in 2000 when Steele reckons she spent just 5 percent of her time on compliance tasks. Steele now spends almost half of her time at work maintaining compliance files.
Steele's story is not uncommon. According to Registered Rep.'s Annual Sales Assistant Survey, a quarter of sales assistant respondents say compliance duties take up to half of their time, and nearly twice that number say they are spending more time on compliance this year than last. Meanwhile, for most sales assistants, compliance is now on the long list of duties they need to attend to: Some 61 percent of sales assistant respondents say they spend some time on compliance duties.
Just to give you an idea of what this means, the litany of files Steele has to manage cover subjects such as advertising, anti-money laundering rules, compliance notes, complaints, incoming and outgoing correspondence, bank deposit reports, do-not-call lists, branch file reviews, non-cash compensation, notarized papers, outside business activity, privacy policy, security and check receipts, “signature guaranteed papers” and updated prospectuses. And don't forget the client account forms Steele has to prepare in addition to the research she conducts on new compliance rules and regulations. And then there are her other office-related duties.
Today, the annual compliance audit at Steele's LPL Financial office lasts six hours — including a lunch break, says Steele. Nowadays, she works with just one advisor at Ouellette, who manages over $100 million in assets. “Since we had our best increase in AUM and the best audit in the same year [2007], we are living proof that it is possible to reconcile good service with compliance's increasing amount of paperwork,” she says. “This reconciliation is the most challenging part of my job, but when it's successfully accomplished, it becomes the most rewarding.”
Indeed, sales assistants play an integral role in making sure their advisors are in compliance with industry regulations. “If I don't do my part, the rep cannot fulfill his compliance requirements during an audit, which could mean a fine or the office could be closed, which would affect every single client,” says Steele. “If a client were to complain about the rep and an investigation happened, the compliance files that I keep would be essential.” As Steele notes, it is no minor task: “Since the laws are frequently changing and computer systems are being added to acommodate these changes, I am constantly in training.”
ASSISTANTS' EVER-CHANGING ROLE
Just when we thought sales assistants had mastered just about every part of the advisory business — most of them hold a Series 7 license and do everything an advisor does short of making investment recommendations to the client — a whole new category of responsibilities has cropped up. (In fact, some assistants are called “paraplanners,” and function much like paralegals do in law offices.) With the financial fallout from the sub-prime debacle and the frozen auction-rate securities market, regulatory bodies have a renewed interest in their customer protection mission. For sales assistants this means a proliferation of new forms to prepare, client signatures to secure and files to submit. With this increasing span of compliance duties to tend to, it's no wonder firms are responding by beefing up on compliance technology and training to help sales assistants keep their advisors in full compliance.
“Every time a regulatory rule changes and there is a new form or a new signature, it falls on the shoulders of the sales assistant to make sure the broker does it,” says David Thetford, securities compliance principal analyst at Wolters Kluwer Financial Services and a former examiner/auditor for the then-NASD. “Or, in some cases, the sales assistant goes straight to the customer for the broker. The broker is the one who will be held responsible and accountable for it, but the sales assistant is the one who does it.” And that means more work for the sales assistant with each new rule change.
This also means that sales assistants are charged with staying on top of (sometimes) complicated regulatory changes. Take the new FINRA Rule 2821, effective this May. The new rule regulates broker/dealers' compliance and supervisory responsibilities for deferred variable annuities transactions. Generally, deferred variable annuities are contracts between an investor and an insurance company, where the insurance company promises to make periodic payments to the contract owner at some time in the future. The new rule attempts to clear up any confusion over the complex hybrid investments by requiring b/ds to have supervisory procedures in place, and training programs for registered individuals recommending and reviewing deferred variable annuity transactions.
“Rule 2821 is a classic example of taking something like the variable annuity, something that has been in the industry for a while, and making it more complex,” says Jim Heeney, vice president of sales supervision at independent b/d Securities America. Heeney says the challenge firms face in adopting this new rule is making sure they equip their sales assistants and sales forces and provide principal approval within seven days — as the new rule requires.
THE BRIGHT SIDE
It's not all bad. Sales assistants say their b/ds not only keep them on top of these regulatory changes, but also provide them with the technology to speed up compliance tasks. Cheryl Spencer, an assistant office manager with Gilleam Mease & Associates, an independent firm in Louisville, Ky., affiliated with Securities America, says her b/d's technology provides her with the tools to tackle new regulatory rules. For example, Spencer can log into Securities America's desktop system, e*Office Advantage, to access web casts and training on new regulatory requirements. Spencer also uses the automated system for other compliance related duties, such as getting compliance approval on advertising literature, as it allows SAs to upload advertising files and get approval without any paper changing hands. In the past, Spencer says she had to fax in the document and wait for approval.
For Spencer, this saves valuable time. Everything her team does at some point is tied to compliance, which means she spends two to three hours a day on compliance related duties, or about 30 percent of her time. There is no doubt that her compliance duties have increased, says Spencer, but the automated processes enable her to squeeze the additional duties into a smaller window of time.
Says Heeney, “Around the country, at big and small firms, you walk in and ask, ‘How do you [provide evidence of] supervision, or how do you track marketing materials blotters and things?’, and people are going to pull up excel spreadsheets. The complexity of our business is such that we can't do that anymore. We can't add bodies with every new regulation, and we can't continue to pile it on all of our supervisors and sales assistants in the field and ask them to do more. So we have to leverage with technology.” Heeney says Securities America has spent over $5 million on compliance and supervision-specific technology, and they spend another $2 million annually to maintain their technology licenses.
LET'S GET SOPHISTICATED
In addition to their investments in compliance technology, firms are spending more time and money training support staff. For example, this summer, Commonwealth Financial, an independent b/d in Waltham, Mass., introduced a new advanced topics symposium, a two-day conference for addressing everything from compliance to tips for savvy Morningstar users to understanding the criteria of a mutual fund recommended list. “We have found that the staff in an advisor's office is much more sophisticated than they used to be. And there is more diversity — from paraplanners, staff CFPs, staff CFAs — we've got some very sophisticated marketing folks,” says Joni Youngwirth, managing principal of practice management at Commonwealth.
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