Compliance Monkey

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.

While compliance duties might be taking up more of their time, sales assistants have proven they can handle it. Since Registered Rep. started doing its sales assistant survey in 2000, sales assistants' have evolved into mini advisors. (See p.54, “Just Don't Call Them Sales Assistants”) “No matter what kind of expertise they have, they're more professional and they're more into their careers. This isn't just a job for them anymore, this is their profession,” says Youngwirth. “I remember a time when not that many of them had their licenses; now it is almost a prerequisite. Most of them have a 7 and many of them have beyond that.”

In fact, Registered Rep.'s annual survey found that the majority of sales assistants (82 percent) have a Series 7; another 61 percent hold their Series 63, 16 percent have a Series 55 and 26 percent hold a Series 66. Take Mega Snyder, who started in the financial advisory business in 1997 and got her Series 7 in 2001 when her advisor expanded her role at the firm. “Mega's role has evolved into [that of] an operations manager and under that are a host of compliance duties, for three remote offices and 11 advisors here,” says Steve Stocker, founder of Investment Partners, a wealth management firm headquartered in New Philadelphia, Ohio.

In addition, sales assistants are on the front lines of client communication. The majority of sales assistant survey respondents (61 percent) say clients rely on them for a variety of needs, including some types of advice. In fact, a sales assistant's ability to develop a close relationship with clients helps them fulfill their compliance duties. Steele says she helps clients the way she might help a friend, an approach that has actually lightened the burden of her compliance duties.

“If clients sense this disposition, they are more willing to take their time to review and sign the new compliance forms that I am constantly sending to them in the mail,” Steele says. “Now that the clients see that I am working in their best interest, the average time that it takes for a client to return a form has decreased from three months to less than two weeks. This reduces the amount of follow up that I have to do.”

Of course, the kind of personal attention clients get from sales assistants like Steele doesn't come cheap. Steele estimates her compensation has increased by about 5 percent a year, with a bonus at the end of the year. She also received a bonus after getting her paraplanner designation and her Series 63 license. This serves as a reminder to firms and reps to keep salaries competitive if they want to retain their top talent, like the Outstanding Sales Assistants we profiled this year, starting on page 59.

Bring The Auditors, Guns And Money!

Escalating compliance costs in the brokerage industry are in the billions, choking firms' revenues.

It is estimated that the securities industry spent $23.2 billion on compliance-related activities in 2004 and was projected to spend $25.5 billion in 2005, according to the most recent survey of Securities Industry Association (SIA) — now the Securities Industry and Financial Markets Association (SIFMA) — member firms. It's no wonder member firms say that over the past five years (since February 2006 when the survey was released) the “regulatory and legislative mandates have had a material, adverse impact on overall compliance spending levels.” Guess what that compliance spending is paying for? The majority (93.9 percent) is “staff-related,” which includes base salary, variable compensation, employee benefits and overhead, “with the greatest impact in recent years on management positions.”

Percent Of Net Revenue Spent On Compliance

(2004 figures, latest available)

Type Of Firm	Percent Net Revenue
All firms	13.1%
Large firms	14.9
Mid-sized firms	17.5
Small firms	8.6
Source: SIA, “The Costs of Compliance In the U.S. Securities Industry,” February 2006.

Just Don't Call Them Sales Assistants

Is the title “sales assistant” going the way of the word “stockbroker?”

Take it from me: Don't call a sales assistant, well, a sales assistant. I learned this after talking to literally scores of sales assistants (oops, sorry) across the wirehouse, independent and RIA channels around the country. Virtually none of the individuals I spoke to referred to themselves as “sales assistants.”

For example, Edward Jones calls its sales assistants “branch office administrators;” Morgan Stanley dubs its sales assistants “client service associates” or CSAs. At Merrill Lynch they're called client associates (CAs); Smith Barney has a handful of names for its sales assistants.

In fact, some of our readers were just downright confused when we asked them about their status as sales assistants. “Can you tell me more about what you mean by ‘sales assistant?’” asked one. “I don't think we have that role [here].”

Some even seemed to take offense at my use of the word. Says one Smith Barney advisor, rather indignantly: “Those of us who serve as trusted advisors do not think of our roles in terms of sales; we think in terms of service. We are concerned with effective wealth management, which means capital preservation, risk-adjusted returns, identifying and achieving realistic goals, managing tax liabilities, etc. Our function is process-oriented, not product-driven. We train our staff members to be trusted associates; they are not servants or lackeys. Therefore, correctly stated, we have service associates, not sales assistants.” (Okay, I got it!)

In truth, this advisor has a point. Google searches for “sales assistant” come up with few results, and the same thing goes for the word “broker” — at least when associated with advisory firms. Just as advisors have mostly shed their sales personas, it seems “sales assistants” have outgrown their sales assistant roles. Check out page 59 for some of our Outstanding Sales Assistants, who have proved to be much more than their titles imply. — CM

HOW THIS SURVEY WAS CONDUCTED: From the end of July through August, Penton Media's Marketing Research unit emailed 1,071 Registered Rep. subscribers. Subscribers indicating a job function of Sales Assistant were specifically selected. The survey's effective response rate was 14.1 percent.

COMPLIANCE PROS

SAs WHO SPENT HALF OR MORE OF THEIR TIME ON COMPLIANCE DUTIES

	Respondents	%
Primary job responsibility
Client service	21	50.0
Client management	14	33.3
Licenses And Designations
Series 7	34	81.0
Series 63	28	66.7
Series 65	10	23.8
Series 66	7	16.7
Insurance	1	28.6
What's your involvement in setting the business strategies, and the goals of the broker?
Not involved, or aware of, the strategies and goals	3	7.1
I am aware of the strategies and goals, but am not involved in their development	17	40.5
I provide some input in the goals and strategies	16	38.1
I am an integral part of the goal and strategy development	4	9.5
Which best describes your working relationship with the FA you work for?
Micromanages my every move; shows little confidence in my abilities	-	-
Manages closely, but not to the point of interfering with myability to get things done	6	14.3
Trusts me to complete my work without close supervision; allows me to take the initiative	35	83.3

SA COMP BREAKDOWN

	Respondents	%
What's your bonus based on?
FA's production	51	37.2
Achievement of preset goals	24	17.5
The discretion of the FA	50	36.5
The discretion of the firm	39	28.5
Do not receive a bonus	16	11.7
Other	3	2.2
No answer
Total Compensation $
Less than 20,000	6	4.4
25,000 to 29,999	3	2.2
30,000 to 34,999	5	3.6
35,000 to 39,999	14	10.2
40,000 to 49,999	10	7.3
45,000 to 49,999	20	14.6
50,000 to 59,999	15	10.9
60,000 to 69,999	22	16.1
70,000 to 79,999	25	18.2
80,000 to 89,999	10	7.3
90,000 to 99,000	4	2.9
100,000 or more	2	1.5
Median compensation:		$47,500
Total Bonus $
None	16	11.7
1 to 999	10	7.3
1,000 to 2,499	26	19.0
2,500 to 4,999	18	13.1
5,000 to 7,499	21	15.3
7,500 to 9,999	6	4.4
10,000 to 14,999	20	14.6
15,000 to 19,999	7	5.1
20,000 to 24,999	6	4.4
Median bonus:		$3,750

MOST SAS ACT LIKE ADVISORS

	Respondents	%
What's your involvement in setting the business strategies and the goals of the broker?
Not aware of the strategies and goals	9	6.6
I am aware of the strategies and goals, but am not involved in their development	50	36.5
I provide some input in the goals and strategies	48	35.0
I am an integral part of the goal and strategy development	25	18.2
Which best describes your working relationship with the FA you work for?
Micromanages my every move; shows little confidence in my abilities	1	0.7
Manages clohsely, but not to the point of interfering with my ability to get things done	13	9.5
Trusts me to complete my work without close supervision; allows me to take the initiative	119	86.9
Other	1	0.7
How do you work with clients?
Clients rely on me only to relay messages to the broker	1	0.7
Clients rely on me for basic administrative services	43	31.4
Clients rely on me for a variety of needs, including some types of advice	84	61.3
Other	6	4.4

The Portrait Of A Sales Assistant

MEDIAN

Years of experience	10
Jobs held since beginning of career	2
Gender	Female (89.8 percent)
Highest level of education	38.7 % have a bachelor's degree
Age	42
Licenses	majority have Series 7 (112 respondents or 81.8 percent)
Hours worked per week	38
AUM	$175 million
Production	$1,250,000