Compliance August 17, 2022

SEC Flexes Regulatory Muscle with RIAs, Brokers in Focus

The SEC is warning advisers and broker/dealers that it is time to tighten up policies around conflicts of interest and ensure compliance with its Regulation Best Interest.
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Early this month, the Securities and Exchange Commission released an updated staff memo that provides additional guidance on conflicts of interest and the enforcement of the SEC’s Regulation Best Interest rules for broker/dealers and registered investment advisers.

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The memo represents the latest update to a string of publications the market regulator has released since finalizing Reg BI in 2019. Sources say the update’s Q&A format provides helpful, concrete examples of what types of compliance procedures and strategies the SEC is looking for, based on current guidance and issues that have come up in recent examinations.

Compensation practices are a key focus of the new guidance. The SEC memo emphasizes that any compensation that arises from agreements with third parties could create incentives that aren’t in a client’s best interest. It also stresses that firms must have clear processes in place to avoid the creation of adverse incentives.

Alongside this, the SEC also highlights issues that may arise from limited product menus. Limited product menus are allowed under Reg BI and other conflict of interest standards, but organizations should make sure that their offerings are not limited in a way that could lead to a conflict of interest or adversely influence the advice being offered.

Understanding the SEC’s Focus

“What we noted in a recent client update and what we are seeing from the SEC memo is that the Commission is really treating broker/dealers and investment advisers the same, in terms of their duties to clients,” says W. Hardy Callcott, a Los Angeles-based partner at the law firm Sidley. “There was some debate as to whether Reg BI would put broker/dealers on equal footing with advisers, and we think they have been, at least as it relates to conflicts of interest.”

Callcott says firms should have a process in place to monitor for conflicts of interest throughout the year and make updates accordingly. He notes that the Reg BI memo points to the role of sales representatives as a main area where conflicts may arise, and that the activities of sales reps may require firms to update their Form ADV and Reg BI disclosures if prices, products, menus or compensation changes occur.

Callcott says many broker/dealers are still working through the new requirements of Reg BI, given that they used to operate under a lesser suitability standard. But registered investment advisers are also making changes in an effort to ensure their own compliance procedures are in line with the SEC’s expanded expectations.

Mary Giconi, chief compliance officer at Fort Pitt Capital Group in Pittsburgh, says many advisers are likely to see these updates as confirmation of what they were already doing. She adds that it can be worthwhile for firms to undertake a review based on new information.

“Compliance within the adviser space has really matured over the years, especially at the larger firms,” she says. “That said, the point in the memo about not relying purely on disclosures is an important one. What we have tried to do at Fort Pitt is create a culture of compliance. That includes documentation, but it also includes constantly reviewing our processes around compensation, client service, gifts and entertainment. We try to build a culture of compliance so that it is embedded within our work.”

Giconi adds that it can be beneficial to treat compliance like an ongoing conversation within the firm, so that advisers feel like they can ask questions.

“The role of the compliance officer has changed significantly,” she says. “Compliance has really shifted from being a reports-generating department to a more dynamic part of the organization. There is a greater focus on training and building dialogue with the advisers so that we are providing the best client service that we can.”

The Compliance Dialogue

Building more dialogue into the compliance process can be helpful with client service, Giconi says, because it helps clients make informed decisions. Disclosure documents are important to provide to clients, but flooding clients with paperwork doesn’t always mean that they will read or understand everything.

Michael Mann, a partner at law firm Crowell & Moring, agrees. He says ongoing review and dialogue can uncover conflicts that may not be immediately clear.

“As markets have gotten bigger and broader, the potential for conflicts of interest to arise has become greater,” he says. “When you are dealing with complex and overlapping relationships, the question of fee disclosure, calculation and attribution can be extraordinarily complex and differ on a relationship-by-relationship basis.”

If a firm serves a diverse group of investors, for example, they each may have different agreements or needs, and these understandings may create conflicts that may or may not have been clear from the outset of the relationship. In every case, the potential for conflicts must be understood and addressed, Mann warns.

Mann notes that the rise of environmental, social and governance investing has also put a renewed focus on governance, and the SEC’s new ESG rules should also be a growing focus for registered firms.

“If you look at where the work is being done, governance is probably the most understandable component of ESG and the most measurable,” he says. “I think this is part of that piece too – looking at how firms conduct themselves and how securities laws protect investors in this broader context.”

Practice Management August 10, 2022

Talent Management Trends and a Focus on the Future

Many financial advisory firms are rethinking their talent management strategies, with a focus on serving a more diverse and dynamic set of future clients.
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When it comes to talent management, financial advisory firms are facing a number of challenges.

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To begin with, the advisory workforce skews older than many other professions, and many of the most successful professionals are nearing retirement age and considering an exit plan. Meanwhile, during the pandemic, those in the early or middle stages of their career got used to a new level of autonomy and flexibility that may not remain the norm.

Attracting new talent to the field is also difficult, and few collegiate programs are dedicated to financial planning and proactively bring new people into the field. Taken together, these factors are requiring financial advisory firms to rethink talent management in order to attract and retain talent—as is the pressing need to improve the diversity of the adviser industry workforce.

Future-Proofing

As PLANADVISER recently reported, J.D. Power’s “2022 U.S. Financial Advisor Satisfaction Study” shows that adviser attrition risk has increased this year across all categories, with 15% of advisers at wirehouse firms and 7% of independent advisers now categorized as “at risk” of leaving their firms in the next two years.

“It’s no secret that the adviser population skews older—that’s been a story for some time. However, our data shows that firms are focusing more and more on talent management,” says Mike Foy, senior director of wealth and lending intelligence at J.D. Power. “They are thinking through succession plans and are also putting more resources behind improvements in the adviser experience, whether that be through technology and platform upgrades or by adding more flexibility into work schedules. Those are some things that are going to keep current advisers on board and support efforts to bring on new talent.”

Succession planning is a core focus for advisers as they think about the future. Sources say firms that have older senior management teams are more likely to consider selling to an aggregator. Even if they don’t have such a plan in place, the firm needs to have a strategy to formalize and share institutional knowledge.

“We are seeing a bigger focus on ‘teaming,’” Foy says. “With a team-based advisory approach, younger advisers are getting paired with senior professionals so that information is being shared across the organization. A team-based approach also can benefit clients; for example, if someone transitions out of the firm, that client service relationship continues without a significant disruption.”

Stephen Caruso, a research analyst on the wealth management team at Cerulli Associates, adds that “sell and stay” programs are becoming more popular. These programs allow senior advisers to sell out of their books, but they also have a built-in phase-out plan, so that they can transition client relationships over time.

“Firms really want those transitions to be as seamless as possible,” he says. “We’re seeing a lot of work going into making sure the changes aren’t abrupt.”

Finding the Right Mix

As financial advisers realign for the future, many of them are considering how best to structure operations, whether that means centralizing in a single home office or operating in a more decentralized format through branch offices across many cities.

“Firms that we are working with are focusing on how best to manage internal resources,” says Sean Kenney, head of defined contribution at MFS Investment Management, which works with adviser firms on team management through its Advisor Edge program.

Kenney notes that the way firms choose to allocate resources can affect where they hire from and whether advisers ultimately stay on. A more centralized model will naturally limit the pool of potential candidates to the areas around the home office and/or branches. A more decentralized model could provide a larger pool of potential candidates, but it may be harder to establish and maintain a strong firm culture. Approaches to “flex-work” may also look different within these models.

Shauna Mace, head of practice management for SEI’s adviser business, agrees. She says many firms are looking closely at compensation to attract and retain talent.

“We have seen a lot of consolidation, and there is a lot of movement in terms of how advisers find themselves at their current firm,” she explains. “If you are coming from the wirehouse channel, for example, you could see a combination of salary plus some component of incentive compensation. But if you come from the RIA world, it could be salary plus a team-based bonus.”

Mace tends to see friction when advisers face a significant change in their compensation terms. She says there should be better systems in place for adviser firm leaders to understand and respond to compensation changes for incoming talent.

“This is critical if you want to avoid attrition and/or bring on new people who may not be used to your compensation model,” Mace suggests.  

Michael Rose, associate director of wealth management at Cerulli Associates, says investment in “wealth tech,” or the technology solutions and systems that power modern financial advice, can also support talent management. Advisers, like their clients, are looking for an easy user experience, and firms that invest in better platform technologies could come out ahead.

“These improvements can be a differentiator,” Rose says. “They are valuable from an administrative perspective. Also, technologies that can support advisers as they manage the entire wealth picture for their clients are important. There is a big shift to this concept of ‘total wealth,’ which means taking the focus away from only investments and considering tax needs, estate planning and so on. Being able to present the whole view to clients is accretive over the long term.”

Moving Beyond Headcount

Across the advisory and financial services industries, the subject of diversity, equity and inclusion has come to the fore. Sources agree that putting a DEI strategy in place is both the right thing to do and a critical means of attracting talent that is more representative of the total potential client base. Larger wirehouses, broker/dealers and aggregators are all adopting DEI policies within their hiring frameworks, but MFS’ Kenney is quick to point out that the policies alone aren’t always enough.

“Firms tend to get caught up in the metrics of DEI,” he says. “They treat it like a headcount issue, and once the top line number looks good, they think they are on the right track. But that’s only part of the equation. Firms have to focus on inclusion. If diverse candidates don’t feel like they are able to contribute or advance, they aren’t likely to stay.”

Kenney says firm culture can help encourage diverse candidates to stay. If, for example, team meetings are dominated by just one or two voices, or if ideas and action plans are flowing from senior management only, that could be indicative of an inclusion problem.

SEI’s Mace notes that there is also a client impact.

“We all know the statistic that 70% of women fire their financial adviser after their husband dies. That is because the relationship isn’t there,” she warns. “We see this with younger generations, too. They want an adviser that looks like them, that has had similar experiences. If there is an adviser servicing a family already and that adviser isn’t taking time to build the relationship throughout the entire family—even if they aren’t profitable members right now—that’s a relationship that isn’t likely to remain long-term.”

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