by Shelley A. Lee
One group's grumblings range from not being allowed to host
webinars or do seminars (is this 1970?), to restrictions on using
material from CFP Board, to being prohibited from doing any pro
bono work, to not even being allowed to mention financial planning
in a voicemail greeting.
The other group says that while they do sometimes say "no," they
try to explain why, exist only to help advisers stay in business,
are the best friend an adviser could ever have, and only
occasionally feel the love from advisers. And that they embody the
old saw attributed to Mark Twain: "Don't shoot the piano player;
he's doing the best he can."
Compliance as the "sales prevention department" is about the oldest
joke in the business of financial services. And while many
advisers, either dually registered as RIA and FINRA-registered rep
or simply FINRA-registered only, do sing the praises of their
broker-dealer's compliance staff, there still seems to be a
disconnect between advisers and compliance—in issues on
which they're focused, on things they want to do, and on how to
have a happy meeting in the gray areas. The love-hate relationship
is nothing new, and is likely rooted in older models of the
compliance function—few compliance officers in the 1980s,
for example, probably described themselves as "business partners"
with the firm's advisers—and in a time when the profession
was feeling its way through a wild, wild west that often resulted
in bad business practices, questionable product recommendations,
and gaps in supervision. And yet, as far as we've come, in 2009 and
2010, there was no absence of headlines about firms' and advisers'
entanglements in client "misunderstandings" and finger-pointing on
auction rate securities (and their subsequent settlements),
unsuitable private placements, "churning" of customer accounts,
failures to monitor e-mail, and just plain old fraud and
theft.
Compliance is about risk management, reminds Nancy Johnson-Jones,
CFP®, a compliance consultant in Denver, Colorado. "When
just one bad apple makes a headline, advisers get ready for more
'noes.' But I do think most advisers really understand that each
firm makes a business decision on how much risk and exposure it's
willing to take. And if advisers are paying attention to both
Washington and the headlines about adviser misdeeds, they
appreciate that compliance departments are under a lot of pressure
to protect everybody's interests," says Johnson-Jones.
How they do that and how it's perceived by advisers is largely a
function of the firm's overall philosophy and model for compliance.
If compliance is part of the legal department, conflict can arise
from attorneys' natural interest in protecting the firm;
compliance, on the other hand, may be focused on a goal of helping
advisers improve their practices and procedures. In companies where
both legal and compliance are on equal footing but operate as
separate departments, regulators may view the model as one that
demonstrates a company's "culture of compliance." Compliance
officers maintain that they're not in the business of "just say
no," but do acknowledge that plenty of advisers are quick to share
a horror story about compliance and its naysayers.
"Our philosophy is never a blanket 'no' to a request unless the
relevant rules are beyond question," says Tom Anderson, chief
compliance officer of independent broker-dealer Cambridge
Investment Research of Fairfield, Iowa. "If the rules aren't
crystal clear, we're open to discussing an idea. Our focus is a
common sense approach to compliance that includes a consultative
approach to helping our advisers succeed in business, as well as
being compliant with rules and regulations."
What's Really on Their Minds?
It's understandable that two groups of professionals engaged in
very different daily routines would have very different
perspectives on what they consider the most pressing issues.
Compliance officers say they are concerned about Congress's new
activism in regulatory and oversight details, about the long-term
consequences of pending regulatory reform, about what it will mean
for advisers on "pocketbook issues" such as the possible
elimination of 12b-1 fees, and on what it will mean if advisers'
independent contractor status is removed from the tax code.
Advisers, on the other hand, are frustrated because nobody can
quite answer the question: Why is a new account form eight pages
long?
In a recent FPA survey of 337 members, both dually registered and
FINRA-only, more than 60 respondents offered comments about which
compliance item or activity takes the most time and causes the most
aggravation. The largest number of comments could be summed up as
"paperwork"—client contracts, ADV amendments, investment
suitability documentation, disclosures, procedures, manuals, and
forms, forms, and more forms. Paula Dorion-Gray, CFP®, a financial
planner in Crystal Lake, Illinois, who is affiliated with
Securities America, is probably typical of many smallish financial
planning firms who face a daily struggle just to keep up with
"mounds and mounds of paperwork." Three advisers require a support
staff of five people, primarily to prepare, process, and archive
client paperwork.
"When I started in business 28 years ago, a new account form was
one page long," says Dorion-Gray. "And now there are more and more
and more disclosures required. It's beyond my
understanding. And I don't care how many pieces of paper you put in
front of people, they don't want to read it and they don't
understand it. It's insane."
Dorion-Gray believes that while much of it is because of increased
regulation, some of it is the result of broker-dealers' general
fear of investor claims and litigation. "It's hard to blame them,
though, because we're still waiting for all the Bernie Madoff
repercussions to come down the pike."
Watching and waiting for those Madoff repercussions is more than a
full-time job for most compliance officers, and is described by
Tracy DeWald, senior vice president and general counsel for
Securities America Inc., as the most intense period he's
experienced in his 22 years in the profession. While planners may
feel overburdened by the required paperwork, compliance officers
are almost totally consumed these days with Washington's work on
major regulatory reform.
"If I had nothing else to do, I could spend every day just reading
and trying to keep up with everything being proposed by Congress
and the states," says DeWald. "We're in the most flux we've ever
seen and we're working hard to keep on top of this and project out
what we'll need to do in compliance. It's understandable that
advisers don't see this as something that affects them daily
because at the moment they don't have to do anything different.
Right now it's so overwhelming—new custody rules, the
FINRA rulebook consolidation, a possible new fiduciary standard for
all—that many advisers are just tuning it out."
Staying ahead of the curve is almost not an
option—compliance officers say they're able right now just
to stay with the curve. But they maintain that their compliance
philosophy is about collaboration with advisers to, in effect,
practice defensive financial services. And the blame for needing to
practice defensively can be put on Washington. Because of continual
new rules and regulations, firms have been forced to be more
"directive and prescriptive" with advisers and less discretionary
and subjective, says DeWald. Take for example heightened concern
about privacy and identity theft among legislators and regulators.
Advisers would like to maintain their position of, "I'm running my
own business and should be able to determine what software I want
to use," says DeWald, "But we're in the position of having to
ensure the integrity of information, so things become more
systematized and uniform. A broker-dealer wouldn't be able to
function with 2,000 individual, customized programs being used by
advisers."
Anderson agrees with DeWald that rules and regulations are changing
so much and so fast it's challenging to maintain a primary
compliance department value proposition: to anticipate what the
questions about a new rule may be.
"Right now, I'm knee-deep in figuring out what I see as potential
unintended consequences of the SEC's new custody rules for RIAs,"
says Anderson. "We're trying to get ahead of this for our advisers.
The rules are so new they probably haven't yet had a chance to
decide what questions to ask."
At the broker-dealer Lincoln Investment Planning, chief compliance
officer Nancy Heffner is also highly focused on
Washington—specifically because of the firm's niche in
retirement plans such as 403(b)s, and the current proposal from the
Department of Labor (DOL) on eliminating all of what DOL sees as
conflicts of interest among advisers giving advice to ERISA
accounts.
"In our opinion, it goes way beyond disclosure," says Heffner. "It
has the potential to significantly change our business. I know our
advisers assume we're working on issues that will affect them, but
their daily focus is how to see more clients. The lack of time to
spend with clients is the real cost of more regulation."
If advisers seem less focused on how Washington's decisions may
affect them, it's because post-market crash they're more focused on
keeping the clients they have and strengthening those
relationships, and on getting new clients for future growth. And
that issue—marketing—is one on which some
advisers feel the frustration most acutely. Specifically, the "open
to interpretation" situation of what they can and cannot do.
While quick to acknowledge the responsiveness and high quality of
the compliance staff at Securities America, Dorion-Gray says that
her firm's marketing strategy—Web and print advertising
and webinars for clients and prospects—is difficult,
primarily because of the differing views among compliance staff on
language that can be used. "I'm sure they're no different than
every other large broker-dealer," she says. "But we're trying to
stand out in a very competitive world. We can't use the word
'expert.' We can use the word 'trust.' Colleagues at other
broker-dealers can't use 'trust.' And we've had a few go-rounds
with different members of compliance who come to different
conclusions on terminology. Because there's so much gray, you
really have to weave and dodge. It takes more time than we'd like
and is a big issue for our practice." Adds another planner, who
wishes to remain unidentified, "The broker-dealer's advertising
division generally takes two weeks to change 'happy' to
'glad.'"
Navigating Social Media
"What can I really say?" is at the heart of the newest and
potentially thorniest issue for planners and their broker-dealers
to negotiate—the use of social media. Exploding in use,
social media platforms such as LinkedIn, Twitter, YouTube, and
Facebook have captured the attention of advisers, broker-dealers,
and regulators. The big picture statistics are impressive:
according to The Nielsen Company, in December 2009 there were more
than 307 million unique users on global social networking sites,
with Facebook accounting for 67 percent of the traffic. In the same
month in the United States, time spent on social networking sites
had increased 210 percent in just one year. The Pew Internet &
American Life Project reports that 46 percent of American adults
who use the Internet had a profile on an online social network site
in 2009, up from just 8 percent in 2005.
According to a report by McKinsey & Company, "marketers" in
general report the top benefits of Web 2.0 tools as increased
marketing effectiveness, higher customer satisfaction, and reduced
marketing costs, and that their three leading marketing priorities
are new customer acquisition, customer retention and engagement,
and thought leadership.
With its low technological barrier to entry and almost zero hard
cost, advisers also are beginning to tiptoe into social
media—in some cases with the cautious blessing of their
broker-dealers and in others with the "it's easier to ask for
forgiveness than for permission" position. A new study from
American Century Investments indicates that 73 percent of the
survey participants—financial planners, brokers, and
RIAs—have a profile or account with one or more social
media platforms; 44 percent of respondents said social media is "an
emerging trend with significant future potential" for businesses
like theirs. A March survey conducted by On Wall Street
magazine and LederMark Communications indicated even higher usage
of social media by financial service professionals: 85 percent of
those under the age of 50 are using social media. In FPA's March
survey, 42 percent said they are participating in social media.
Only 34 percent said their broker-dealer has restricted them from
using social media, a number that compliance consultants say
surprised them.
"I would have thought the number would be more like 65 to 85
percent who restrict it," says Nancy Lininger, founder of The
Consortium, a compliance consulting firm. "The FINRA guidance is
very new and broker-dealers haven't yet had a chance to digest and
absorb it so they can develop their own rules. But for certain,
social media is an issue for which it's no longer practical for any
broker-dealer to say no indefinitely. A certain type of adviser is
going to push hard for those firm guidelines to come out sooner
rather than later."
Lininger says that FINRA's guidelines, released in January, gave on
one hand and took away on the other. "While they do say they want
to be flexible and allow firms to develop practices so that
advisers can communicate with clients and prospects using social
media—in the past, their 'unofficial' position was 'no,
because you can't monitor it'—they also require every firm
to have a system to retain and retrieve communications on social
media, while also saying they aren't certain adequate technology
exists." FINRA's guidelines also purport to address only the
business use of social media such as Twitter, Facebook, and
LinkedIn. "But it's very difficult to put a 'wall' between personal
and business use of social media," says Lininger.
Indeed, even a cursory glance at some advisers' posts on Twitter
(and there are at least 400 active users, both RIAs and registered
reps, according to a directory published by AdvisorTweets.com)
indicates how difficult the wall is. One CFP practitioner posts
about a Roth IRA conversion and how to open a Simple IRA, while
also tweeting about a baseball game and his personal training
regimen. Another names his coffee-brand addiction and also
recommends a CRM system. Some are fee-only RIAs, others are
affiliated with a broker-dealer. And not all of them want to talk
on the record about their use of social media. Two who declined are
affiliated with the largest independent broker-dealer in the United
States; one active tweeter says he is waiting on his firm to
establish what is and what is not allowable and to better
understand the rules himself, a bit of a cart-before-the-horse
position for any adviser who doesn't want to run afoul of a firm's
compliance or regulators.
It's easy to see why compliance professionals are uneasy with
social media—compliance is all about control and order,
and social networking is about everything but that. Compliance
officers interviewed say their social media policies at the moment
are "LinkedIn only," a static profile that must be reviewed by
compliance before it's posted as per FINRA's existing advertising
rules. Heffner's firm even requires advisers to join the Lincoln
LinkedIn group—the firm can then easily monitor advisers'
activity, such as new connections or new groups joined, by
reviewing a daily or weekly e-mail update on activity within the
Lincoln group. Both Securities America and Cambridge are working on
new social media policies for their advisers. Anderson says he'll
roll Cambridge's out within six months. "We don't have huge demand
for using social media yet," says Anderson. "But we do believe
social media is here to stay and that we need to provide a solution
for advisers. It may not be perfect, but we'll make it work."
Securities America is currently analyzing technology vendors'
capabilities for capturing, supervising, and archiving content.
"There are recordkeeping services for individual advisers to manage
their content, but based on the size and structure of our firm,
technology at the enterprise level is a necessity," says Phyllis
Nelson, compliance manager. "The FINRA guidance was certainly
helpful, especially its clarification on advisers not being held
responsible for third-party posts to a blog. For any broker-dealer
and its advisers, the key to being successful and compliant in
social media is going to be to really understand what compliance's
requirements are for review and supervision. Firms could have much
stricter requirements than FINRA does."
Chris Hall, senior multimedia training specialist for Securities
America, cautions that while social media does seem to be the
newest shiny object, he is loath to encourage advisers to get on
the bandwagon "just because."
"Walk before you run," says Hall. "Ask yourself if you're really
ready to be blogging or posting on Twitter. What's your purpose and
strategy? What are your expectations for payoff? It's really a
practice management issue. All of these can be great connection
tools and tactics for strengthening existing relationships. But
understand how much more work this could be for you, your
supervisor in the broker-dealer field structure, and your
compliance staff."
RIAs, advisers who don't have to answer to a broker-dealer's
compliance staff but only to themselves or their in-house
compliance point person, have it a little easier. While the SEC
hasn't issued any social media-specific guidelines, RIAs still have
to understand how the SEC's existing advertising rules relate to
their use of social media. Rick Kahler, CFP®, founder and president
of Kahler Financial Group in Rapid City, South Dakota, started his
blog about five years ago and decided not long after that all of
his client communications would be electronic.
"My blog is client communications central—everything I
want my clients to know goes on the blog or out by e-mail, often
with a link back to the blog," says Kahler. He started using
Twitter in late 2008 as a natural extension of his blog and now
includes on Twitter a link to everything he blogs about. Although
Kahler says his general philosophy is to keep Twitter posts mostly
business, he likes social media for its ability to give a feel for
"the whole person." In just 140 characters, you can learn that
Kahler and his father recently attended their 15th NCAA Final Four
together. "It's soft marketing that allows a potential client to
come to you knowing much more about you than in the past," he says.
In the interest of consumer education, Kahler also produces every
blog post as a video and uploads it to YouTube. A recent video
critical of a Dave Ramsey column had 38,287 views as of the writing
of this article.
As for any compliance issues, "I'm my firm's CCO," says Kahler.
"I'd better know what I can say and what I can't, and I make sure
it's archived through a service. My view of regulation is that
you're probably always in violation of something—if a
regulator wants to give you trouble, they'll find something. As
social media continues to evolve and more advisers use it, even
with a broker-dealer's guidance there probably will be some nasty
cases of advisers getting into trouble."
Already, some in the compliance world are taken aback at how the
SEC's and FINRA's own use of social media, Twitter specifically,
are having wider repercussions on adviser transgressions. A blog
from Scott Gottlieb, president of U.S. Compliance Consultants,
notes that one of the SEC's first tweets discussed a recent
enforcement action against an investment adviser. Wrote Gottlieb,
"Whereas before an investment adviser's transgressions were limited
to a select few in the business that knew how to access such
information, now there are literally millions of outlets and
recipients ready to share in an adviser's misfortune.… It stands to
reason that if the SEC knows how to Twitter, then they certainly
know how to troll the most popular social networking Web sites
looking for compliance violations."
Practicing Kindness
One issue on which advisers and compliance officers can agree is
that regulatory examinations and audits can be well
managed—together. FPA survey respondents' comments
included everything from, "It was one and a half days of controlled
terror," to, "Examiners aren't focused on uncovering legitimate
problems, just on CYA," to, "Helpful and easy." Complaints about
SEC or state inspections are nothing new, says Nancy Heffner. "It's
been the talk since I started with a broker-dealer 25 years ago,"
she says. "We're also the first call advisers make when an examiner
shows up."
Almost all broker-dealers do their own routine exams of their
advisers with the goal of helping them prep for the real thing. In
addition to online training, Cambridge has eight full-time internal
auditors whose visits are designed to help advisers know what state
or SEC examiners will be looking for. Securities America's role,
says DeWald, is never for "gotcha," but more proactive to make sure
advisers are keeping the files regulators expect. "The average
adviser could go a very long time, maybe forever, without a FINRA
exam," says DeWald. "It's understandable that when they do have
one, it can be unnerving to be asked for a file you didn't think
you needed. Our role is to make sure they know what to
anticipate."
One frustrating factor not likely to change is that many federal
and state examiners lack industry experience, says Johnson-Jones.
"They know what the regulations say, not necessarily how to apply
them to an adviser's practice," she says. "It's a fact of this
business that the career path is often from working for a
regulatory agency to working at a firm, not the other way
around."
If "just grin and bear it" is the adviser's Cliff's Notes version
of how to get along with compliance's rules, regs, policies, and
practices, it bears repeating that in many cases they are just the
messenger. Be patient, be reasonable, be up on your firm's
policies, be understanding when there's a delay in a turnaround
time you'd like. Compliance professionals really do think of
themselves as your "business continuity" insurance. Says
Johnson-Jones, "I've been in the compliance world a long time and
every day it comes home to me how important and how complicated the
big picture is. An excellent compliance officer who helps advisers
serve their clients well is worth his or her weight in gold."
Cambridge's Anderson notes that kindness is a core value of his
firm. "It's probably a stretch for some advisers to hear compliance
described that way, but we really do try to practice kindness. Even
when we have to say no."
Shelley A. Lee is a writer and business journalist in Atlanta, Georgia. She can be reached at Shelley@ashworth-lee.com .
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