Just how good are branch office managers and OSJs at supervising their FAs? While investor complaints received by the NASD have been climbing since 2002, "failure to supervise" arbitration cases have been falling steadily.
The NASD is agnostic on the reasons for this trend ("We just compile the statistics," they respond); but BOMs/OSJs claim that they have been focusing more on their supervisory role -- and less on worrying about their own production. Further, BOMs surveyed for this article (OK, it's not exactly a scientific survey) say that complexing -- grouping of smaller branches under a nonproducing supervisor -- and new compliance software are also making it easier to spot potential problems.
(Click here, to read more about NASD arbitration statistics and click here to read more about complaints and regulatory actions.)
Darcie Guerin, manager of Raymond James and Associates' (RJA) Marco Island, Fla., branch, is a good example of the new regime. Although she does tend to her own book of 200 clients, this 11-year veteran acknowledges that the new compliance software that kicks out exception reports over "funny"-looking transactions is a big help in policing her FAs. "There's nothing like a good old-fashioned daily blotter to get a sense of what's going on in the office."
In addition to RJA's Supervisory Alert System -- "It's kind of the next generation of surveillance," says Kip Ceravic, RJA's senior vice president and chief compliance officer, of the proprietary system the firm rolled out in 2004 -- there are some basic remedial procedures that BOMs should do to watch for potential trouble. Ceravic recommends that BOMs:
- Review electronic correspondence: "I'm not just talking about email," Ceravic says, "but Bloomberg information and instant-messaging activity."
- Encourage FAs to obtain professional designations: "Whether it's a CFA or CFP designation," he says, "having accredited advisors is always a great preventative measure."
- Review account performance: "That's a great place to start," Ceravic says, "because if a client's account is performing fairly well, they're much less likely to file a grievance."
- Focus on reps' production-to-AUM ratios: "A high ratio may be an indication of unnecessarily high activity in client accounts," he says
- Look for "alignment issues," areas where clients' stated goals and their actual positions do not line up: "When it appears that a client's interests or needs do not match his documentation and/or positions, it's time to update that paperwork," Ceravic says.
Cindy Cheney, director of compliance for RBC Dain Rauscher's Private Client Group, says that even with these software improvements, it's still a tough job. "Our firm has largely moved to nonproducing management teams who conduct the bulk of supervision in the field," she says. "We used to expect BOMs to be great salespeople and compliance experts at the same time, and that's incredibly difficult to do."
Ever since the firm's 150 branches became fully complexed into 40 units -- each overseen by a nonproducing complex director -- in June, "branch audits have fallen to virtually none," says Marcia Hansen, director of business development for Dain's private client group.
"Products have become much more sophisticated," Cheney continues, "and there's a higher probability that certain things -- like annuities -- can be miss-sold. Reps can't possibly be educated on the vast array of these products and their features." As a result, FAs tend to gravitate toward the one or two annuities they know -- and sell them across the board, she says. "You can end up with clients paying for features they may not need or want. We've done a lot of education on annuities; our internal procedures on selling them are much more onerous now than five years ago, in large part because of regulators and the fact that we sell a lot more of them today."
BOMs should steal a page from the old 80-20 rule: In this case, 80 percent of your risk is probably found in 20 percent of your activities. You can break risk down into three categories: high-risk brokers -- such as new brokers or those with any questionable history; high-risk clients -- such as very aggressive clients or elderly ones; and high-risk investments or investment strategies -- such as annuities and mutual fund B-shares.