Before launching The Harvey Group, a two-member practice in Alexandria, Va., affiliated with Commonwealth Securities, in May 2005, Steve Harvey spent 15 years at Morgan Stanley, eight of them in branch management. As a BOM, Harvey says he sat in on “too many arbitrations to count. I was keenly aware of what can go wrong when compliance isn't followed.”
So, when Harvey started looking at independent broker/dealer firms four years ago, compliance was a foremost concern. His issue: Would advisors be in a kind of compliance nightmare, left to themselves to sort out compliance issues? After all, independent contractor financial advisors work in remote locations, and management is often in far-flung cities. Harvey says his fears were quickly alleviated. “I looked at Wachovia, Raymond James and Commonwealth,” he says. “I expressed my concerns and they showed me their built-in compliance controls. There are so many compliance mistakes they're able to stop from ever occurring because the technology at independent firms is so strong. The systems make sure your mutual fund letters are received on time, make sure you don't put in orders for clients in states where you're not registered, all that.”
The fact of the matter is that b/ds of all kinds are pushing more compliance responsibility on to individual reps. Still, overall, independent reps interviewed for this story say the burden isn't much greater than working as an employee. But, naturally, it can be more expensive as an independent. Of course, sophistication of compliance technology will vary from firm to firm, as will the costs. At Commonwealth, compliance technology is provided for a nominal monthly fee of about $150. Even still, Harvey says he spent about $1,000 on a compliance-training course. And, anyway, “When I went independent, compliance was the least of my expenses,” he says.
It's important to note that compliance departments at both independent firms and national full-service firms are both required to hew to the same NASD rules. So, to assume compliance in one advisory channel is tougher than another may be inaccurate. But when making the leap to independence, reps should understand that the complexity of compliance depends on your level of independence. Andrew Daniels, director of field development at Commonwealth Financial Network, points out compliance departments at independent firms are operating with a much smaller number of reps than many wirehouse firms and can afford to customize rules for advisors, thus having a “less cookie-cutter” standard than the larger firms.
Philip Palaveev, senior analyst at Moss Adams, adds “A compliance department at an independent firm is more likely to review separately an advisor's practice and determine if a certain rule is appropriate or not.”
But for those advisors who are looking for further independence through a registered investment advisory firm, compliance burdens can increase. Reps working under an independent b/d's umbrella RIA, also known as “dually registered” advisors, must comply with both NASD and SEC rules. “Regulation is the highest here, and it's complicated because you're complying with both sets of rules,” Palaveev warns. (If your business manages $25 million or more in assets, you must register with the SEC. Smaller businesses need only register at the state level.)
Mike DiGirolamo, senior vice president of Raymond James' Independent Advisor Division says, “Typically, if you're dually registered as an investment advisor and a rep, much of what the firm provides you helps you with the SEC rules.”
Still need more advice? Reps can hire consultants and/or attorneys to help with the added paperwork, putting together compliance manuals and client contracts, DiGirolamo says. And the firms you're registered with would also have resources to help with these tasks. Hiring such folks isn't so expensive. Annual consulting costs typically range from $2,500 to $5,000 for ADV amendments, updates to procedures and mock audits, DiGirolamo says. But lawyer fees can amount to even more.
The good news is that hiring outside help may not be needed anyway: Harvey says choosing a firm with the right platform for your compliance needs may alleviate the need to pay for extra assistance. “One of the reasons I went independent is because these firms enhance the ease of doing business; they don't impede it,” he says.
Jeffrey Korzenik says the thought of extra compliance work really wasn't an issue for him when he made the switch to independence two years ago, after spending 17 years in the management ranks (including branch management) at Smith Barney and Paine Webber. Korzenik, president of Salem, Mass.-based Salem Five Investment Services (a boutique wealth-management firm with six advisors affiliated with LPL), did not take the dually registered advisor route.
His choice may have saved him from the extra effort involved in following both SEC and NASD rules. “You're really keeping two sets of compliance records, advisory and brokerage,” Korzenik says. “And wirehouse reps aren't used to taking direct responsibility for compliance administration.” But if you want to charge for, say, financial planning, you do have to be dually registered (or work as an investment advisor rep for an RIA).
Korzenik cautions advisors looking to join an independent platform to understand their compliance responsibilities as well as what their b/d's compliance tools offer. He says wirehouses, in general, have done a good job investing in compliance-related technology, whereas the same cannot be said of all independent b/ds. “The costs for compliance for a typical rep who goes from a wirehouse to independence can probably best be expressed in terms of time and extra work. It can vary quite a bit based on size and type of business, among other factors. But typically, advisors should expect at least a few extra hours of work per week and a few hours of their staff's time, too,” he adds.
Those extra hours seem to have a payoff in the independent world. Well, at least they do for Korzenik, who says the regulatory environment in the wirehouse sector was working against the advisor. “I feel the whole attitude about compliance in the independent world is much more pleasant,” he adds. “There's a much greater sense of cooperation regarding compliance issues in this environment.”