Murky Waters
More than one adviser who wanted to be interviewed for attribution in this story could not because his compliance department would not grant permission. That is not unusual. Advisers often express frustration that their compliance departments interfere with them speaking to the press or in public. Others believe that compliance personnel hinder their ability to service clients adequately, and still others refer to compliance simply as “the sales prevention department.”
It is generally not the actual rules that advisers find frustrating, but the process of getting approval. Timing is probably the biggest issue advisers have with compliance. For example, seminars have to be planned at least six to eight weeks in advance to accommodate the one or more weeks compliance departments require to approve materials. This can make it difficult to incorporate last-minute updates and news. According to one source, Morgan Stanley’s compliance department generally needs up to two weeks to approve any interview with the press and one week to approve any comments used in the article—delays that do not jibe well with the time frames of most publications.
Of course, many small registered investment adviser (RIA) firms have no official compliance “department” to deal with. Cleveland Hauswirth Investment Management Inc. only has five principals, so the advisers themselves do the compliance, says Nan Cleveland, a principal at Cleveland Hauswirth, which manages more than $150 million in retirement plan assets, in Brookfield, Wisconsin.
Retirement plan sponsors often want their advisers to serve as fiduciaries to the plan. Many broker/dealer compliance departments, however, still prevent advisers from signing on as fiduciaries to the retirement plans they service, says Bill Peartree, a principal with Barney & Barney LLC in San Diego, California, which derives approximately 45% to 50% of its business from employee benefits and retirement plans, and has more than $750 million in retirement plan assets under management. Not being able to serve as a plan fiduciary can be problematic, he notes. If an adviser cannot serve as fiduciary, the plan sponsor is apt to switch to one that will.
On the other hand, Tampa, Florida-based Investech Retirement Plan Advisors has had a positive experience with the compliance department at its broker/dealer Financial Telesis, which works primarily with retirement plan advisers. They are very cooperative and solutions-oriented, says W. Michael Montgomery, a consulting principal with Investech Retirement Plan Advisors. “They’ll tell us if something is not allowable, but try to find a way it can be done within the confines of the regulation,” he says. “They don’t just say “no.””
Still, the Financial Telesis compliance department has, from time to time, reined in Montgomery’s firm. For example, he says, at one point, his firm wanted to send out a communication advertising that they would help plans to choose “the best’ funds. Financial Telesis” compliance department, he says, would not permit that sort of characterization and edited it out.
Sometimes getting direction is not that clear-cut. One problem often expressed is getting help understanding how to correct or remedy something after compliance has rejected it. Often, compliance will say “no” to something, without explaining what can be done to make it workable.
It should be noted that PLANADVISER’s attempts to speak with compliance department personnel to hear their side of the story proved fruitless.
It is not all negative. There is much that advisers can do to make their relationship with compliance work, advisers say. “You need to get the broker/dealer on board and work with it,” says Peartree, whose firm has done just that. At one time, he says, AIG’s new account form was designed for individual, not corporate, clients; personal questions made no sense for corporate clients. Barney & Barney explained the problem to AIG’s compliance department, and AIG developed a new corporate form.
Additionally, notes Peartree, his firm wanted to hold itself out as a fiduciary to the plans it served. AIG, like many broker/dealers, was resistant, he says. His firm asked the broker/dealer to draft guidelines so that advisers could act as fiduciaries, and AIG drafted the guidelines.
Perhaps because of his group’s efforts to help compliance understand their business, Peartree also has been able to turn to his broker/dealer for help. For example, AIG’s compliance department helped his firm create a retirement plan consulting services agreement. “For us to have created this would have been expensive,” he says. AIG also helped develop a consulting services fee schedule and a retirement plan consulting services fee invoice form.
Compliance also can serve as an alarm clock for advisers. Peartree says compliance reminds him of his continuing education requirements to maintain his licensing. “If they were not breathing down my back, I would miss it,” he says.
Advisers can try to work with compliance or fight with compliance. “You have to understand the importance of compliance, although we may not like it,” he says. Compliance has to keep the firm and the adviser out of trouble with regulators, such as the Securities and Exchange Commission (SEC), state authorities, and Financial Industry Regulatory Authority (FINRA), and protect the firm and the adviser from individual and class action lawsuits.
In addition, some compliance departments are working with advisers to resolve any misunderstandings or problems upfront. Raymond James is proactive, telling advisers in advance what materials they will need if an adviser wants to hold a seminar, says Stephen Johnson, a branch manager with Raymond James Financial Services in Salt Lake City.
Gary Gunning, account executive and adviser at Barney & Barney and a branch manager for broker/dealer AIG, chalks up some of the compliance department/adviser tension to different priorities. For example, he says, compliance and financial advisers work on different timetables. Generally, clients want things immediately, he notes, so what may seem like a reasonable delay to the compliance department is not reasonable to the financial adviser trying to keep clients happy. “It’s two different working environments. I’m not sure how much work is on their desk, and they don’t appreciate our situation,” he says.
Johnson also notes that he works with a lot of packaged vendor products, where the materials are pre-approved, so he does not need to seek compliance’s approval too often. “However, when I do, it’s a 24 hour-turnaround,” he says. The 24-hour turnaround, he says, has never caused a problem.
Maneuvering around compliance is also an issue for advisers who work with broker/dealers or wirehouses and want to have a presence in the media. Generally, notes Peartree, at a broker/dealer, an adviser who wants to speak to a reporter for a trade publication or local media can do so without interference, although each broker/dealer makes its own rules. However, if any of that interview is to be published, any printed material needs to be cleared through the broker/dealer, as does any interview for a wider audience such as on radio.
Peartree empathizes with wirehouse compliance departments, noting that sometimes they do have to lasso the outside business activities in which their advisers get involved. Advisers, he notes, have to disclose outside business activities, including retirement plan and employee benefit plan consulting, because the wirehouse, ultimately, must report these activities to FINRA. Additionally, he says, FINRA requires that wirehouses document that they did due diligence in overseeing the activities of their advisers. Back-office compliance departments, Peartree says, have taken the time to learn the rules so that the firm does not put itself at risk.
Advisers should be cognizant that compliance is also only acting in response to new regulations from regulators such as the SEC, FINRA, or state authorities as to how advisers can conduct their businesses, points out Gunning. The goal of compliance is to keep both the firm and the adviser out of trouble. The rules, he says, were put in place to protect the public and provide more disclosure. The fact that it is frustrating is the nature of the system.
Illustration by Chris Buzelli