Compliance Demands ‘Ruining’ The Industry, Advisors Say

By Brian O'Connell

Finance professionals are budgeting more and more time each passing year to filling out forms and documenting meetings -- all part of compliance demands they say are "ruining" the industry.

Increased reporting demands created by new regulations have had a negative impact on the industry, especially client service, a recent national survey of 40,000 financial service professionals concluded.

Eighty-nine percent of investment professionals indicated that heavy documentation demands affect their ability to efficiently produce thorough, timely reports, and records and client notes, the report found.

“That scenario can impact compliance and client service,” stated the report by Burlington, Mass.-based Nuance Communications.

The survey also found that:

• Most all respondents – or 89 percent – say heavy documentation demands are limiting the amount of valuable “face time” with their clients.
• 48 percent say that after meeting or speaking with a client, they have to create at least one full page of notes documenting the full detail of their conversation.
• More than thirty-seven percent of advisors spend more than three hours a day writing client financial plans, regulatory filings or other documentation.

Too Much Oversight?

That begs the question – are compliance obligations too onerous for Wall Street money managers?

“The current state of compliance documentation is ever-increasing based on the premise that you can regulate or legislate away all risks,” said Scott Whitten, chief operations officer of Peak Brokerage Services in Palm Beach Gardens, Fla. “Bringing all pertinent risk factors to the surface does protect the investor, the advisor and investment firms.”

However, when all possible risks are outlined in granular detail to avoid the claim of harm to a client, that is counterproductive, Whitten noted.

“Disclosures are designed to bring clarity and understanding for informed decisions,” he said. “What firms and reps are now doing with disclosures, based on current regulation and prevailing attitudes of regulatory examiners, obfuscates the real risks inherent with
market-driven investments.”

Additionally, many of the new regulatory requirements are far reaching and were implemented in the anticipation of the Department of Labor fiduciary rule, Whitten added. The fiduciary rule was vacated by an appeals court in March.

Still, other rules are being drawn up at state and federal agencies. Whitten called it “a progressive march towards less choices for the financial professional with his/her investment recommendations. Advisors and people in general are resistant to change regardless of topic.”

Holding their feet to the fire isn’t helping matters, as well.

“The build-up of regulatory and compliance-related requirements have sent a signal to advisors that they are guilty until proven innocent,” Whitten said. “This environment of suspicion and fear on the part of advisors is compounded and seen by investment professionals as death by 1,000 cuts.”

Money An Issue

Another issue vexing advisors on the compliance front is the burgeoning cost of meeting Uncle Sam’s regulatory demands.

“The compliance profession does not come cheap due to the training and experience required to keep a firm safe,” said Jeff Groves, president at ComplianceWorks in Los Angeles.

Chief compliance officer salaries 10 to 15 years ago easily could have been $75,000 to $100,000 for small to medium firms, Groves said.

“Now, getting below $150,000 means getting an inexperienced person trying to move up,” he explained.

The compliance controversy has roots in the 2008-09 economic downturn, which most pundits and people blamed on Wall Street.

“Many advisers in business today have not been held to a standard of having a compliance program and are likely the ones complaining the loudest that the cost of compliance is rising,” Groves said. “In actually, they are just catching up to an expense level for compliance that should have been there all along.”

What financial services firms often fail to recognize is they think if they are not stealing money or committing fraud, then they are doing nothing wrong, Groves said.

“However, not having a compliance program designed to prevent or detect wrongdoing and/or not documenting how they do that is doing something wrong and can go to enforcement,” he said.

‘Clearer Guidelines’

Is there a path forward that meets the needs of government regulators and the professional investment advisory community? It is possible, Whitten said.

“Government regulators can help improve the situation by providing clearer guidelines and more communication to advisors, firms and the general public,” he said. “The prevailing sentiment on interpretation of a given rule or code section is towards ambiguity.”

This lack of clarity breeds a perception of the regulator as an adversary and not a partner, Whitten said.

“Advisors can stay afloat of the increasing requirements through technology and training of their staff,” he said. “There are many tools available today whereby the advisor can electronically complete forms bundles which greatly reduces their time completing forms by hand.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].