If you thought compliance and regulatory activity couldn’t get more intense, just wait until next year. Or so say compliance experts at Wolters Kluwer Financial Services in Minneapolis, a firm that provides financial organizations with compliance and operational risk-management solutions. In fact, consumer protection is expected to be the driving force behind new regulations and enforcement actions in the financial-services industry in the coming year. The causes, including the sub-prime mortgage and credit crisis, identity theft and other consumer-related fraud, the creation of a new securities regulatory agency, and an “active” political landscape. are likely all significant contributing factors. (We use the word active although the word demagoguery comes to mind.)
We asked several industry insiders where they think the regulators will be clamping down first—and hardest—so that BOMs might be better prepared. They offered the following:
Protecting investors has become a top priority for regulators as more baby boomers enter retirement and put “unprecedented amounts of money in motion” for advisors, says David Thetford, a former examiner and regulator for the NASD who currently serves as principal securities compliance analyst for Wolters Kluwer Financial Services. “With so many options for money management and retirement planning, there is a tremendous opportunity for financial abuse—particularly among the elderly,” he says. “Unfortunately, you can’t prescribe ethics.”
However, he says the newly formed Financial Industry Regulatory Authority (FINRA) has indicated that its new rulebook—which is in the process of being written and is expected to be out in late 2008/early 2009—will not rely as heavily on traditional protocols or cut-and-dry rules. “Many of the rules for advisors will more be principles-based—and a lot more open to interpretation by regulators,” Thetford says. “In other words, it won’t be enough for an advisor to insist he’s done right by his clients just because he has ‘dotted all the is’ and ‘crossed all the ts’ on a client’s account form, for example.” Regulators, he says, are looking to cast a wider net to ensure that financial advisors are truly doing what is in the best interest of their clients.
Since they’re often less sophisticated and more fearful about investing, the elderly are “easy pray for predatory advisors,” says Andre Cappon, founding partner of The CBM Group, a New York City-based management-consulting firm specializing in the financial-services industry. “That’s certainly nothing new. But BOMs have to micro-manage their reps to help prevent this.” That said, Cappon reckons a manager’s best line of defense is to hire better brokers in the first place.
Concerns are also abound about how advisors are marketing to this audience and presenting their designations. “Regulators are focusing a lot of attention on free-lunch seminars geared to seniors,” Thetford says, “as they feel it puts an undue pressure on attendees to do business afterwards.” Another major concern, he says: “Advisors can take quick correspondence courses—and then put a few letters after their name—implying they can be of extra help to senior investors. We know that CFPs and CPAs, for example, have a lot of extra knowledge. But, there are so many designations out there—particularly geared toward the senior market—which mean virtually nothing.”
In the year ahead, he says, branch managers should pay close attention to the types of seminars and designations their advisors are advertising—particularly to older prospects.
Branch revenue growth is “the single greatest potential source of conflicts of interests for branch managers,” says Chip Roame, Managing Principal of Tiburon Strategic Advisors, an industry research and consulting firm. “Branch managers are under intense pressure to supervise the business that takes place within their branch while trying to grow the branch and bring on new advisors, particularly high-producing ones.” With the overturning of “The Merrill Rule” this year, Roame says, BOMs must supervise their reps even more closely now. SEC Notice to Members 07-06, requires BOMs to take extra measures of supervision of newly hired reps in their first few months. Thetford says, “When new hires bring over clients with proprietary investments from the old firm, they’ll often try to get them to liquidate them and move them to the new firm. But that may not be in the client’s best interest. He or she may be better served by accounts at both firms—and branch managers must stay on top of all of this.”
And this, says a wirehouse BOM in the Northeast who asked not to be identified, creates a sticky dilemma. “The reality is that many BOMs want those assets moved as well.” But, now, examiners will be more carefully scrutinizing the activities of newly hired brokers, as well as the supervisory measures employed by their managers, Thetford says.
And, an ounce of prevention is probably the best strategy, says Stephan Mignot, senior manager at The CBM Group. “Super successful reps tend to leave their firms only when they don’t like their managers, or their firms aren’t doing well,” Mignot says. “If you’re recruiting a big producer and neither scenario exists, a red flag should go up. You need to really scrutinize the situation and the rep’s record.”
Communications With The Public
Communications has been an issue of growing concern over the past few years, and will continue to be important to regulators in the coming year, Thetford predicts. And since there are so many ways that a branch and its advisors can communicate with the public, this should be a major focus for branch management, experts say. Managers need to pay even closer attention to make sure advisors are following their firms’ procedures when it comes to newspaper ads, sales literature, seminars and client correspondence. Although Roame says that’s hardly an easy task.
Still, Thetford insists BOMs need to pre-screen their advisors’ seminar scripts and handouts, and to know who the attendees are. “They need to stay up on the rules and have their hands firmly around the flow of information emanating from their branch,” he says. “I recently saw a $7- million investment banking deal collapse simply because a rep sent an email to someone he shouldn’t have.”
“It’s very possible that 2008 will mark the beginning of a dramatic shift in regulatory compliance in the financial-services industry,” said Sue Burt, senior attorney at Wolters Kluwer. “New guidance, enforcement and legislation could very well direct financial institutions to take on a much more active role in helping their customers choose the products and services that best suit their needs.”
And it’s none to soon for Roame. “It’s high time this industry lifts its standards and brings on fiduciary responsibility for all advisors with all clients.”