The need to do more/spend more on complianceOverall pressures tied to fee compression and industry consolidationThe need to find more ways for advisors to add value to their client relationshipsThe need to do more spend more on new technology and platformsLosing major producers and business to rivals/RIAs/open-platform players
Compliance, Other Pressures
Broker-dealer executives are feeling quite negative aboutcompliance and related pressures impacting their financialperformance. When asked what most keeps them up at night,more than one-third say it’s the need to do and spend more onregulatory matters. They felt similarly in last year’s poll.
Looking at what is behind headaches for their advisors,both compliance demands and business growth top the list (forabout one-third of the BDs each).
When asked which specific regulatory matters most lead toworry, most executives say privacy and cybersecurity. This isthe top concern for 65% of them vs. 53% for Reg BI.
Some two out of five, or 41%, see 12b- 1 fees and revenue sharingtied to mutual funds as a headache. And just about 30% see cashmanagement or bank “sweep” programs as a regulatory burden.
In terms of the cost of compliance issues, LPL said it hadfirst-quarter regulatory charges of $6.2 million; these coststotalled $30.6 million for the past four quarters. RaymondJames, for instance, reached a settlement with the SEC inSeptember and agreed to pay $15 million over advisory fees oninactive client accounts and excess commissions for broker-age-client investments in certain unit investment trusts.
Recently, the SEC has been reminding BDs about what they
can and can’t do when it comes to using the terms “advisor”
In its latest guidance, the agency said it “presumes that the
use of the terms ‘adviser’ or ‘advisor’ in a name or title by a bro-
ker-dealer that is not also registered as an investment adviser
is a violation of the requirement to disclose the broker-dealer’s
capacity under” Reg BI’s Disclosure Obligation.
Still, the SEC “did not expressly prohibit the use of these names
and titles by broker-dealers.” When a BD uses the terms in its name
or title in the context of providing investment advice to a retail cli-
ent without also being an RIA, however, it will be presumed to
violate Reg BI’s disclosure obligation in most cases, it says.
Broker-dealers with an affiliated RIA are prohibited fromusing the names, but a broker-dealer that is also a state-regis-tered advisor can use them.
As for the Financial Industry Regulatory Authority’s crack-
down on advisors with patterns of misconduct and the broker-
dealers that hire them, this regulatory group recently filed
with the SEC to clamp down on “the risk of potential customer
harm that may persist where a firm or broker has a significant
history of past misconduct.”
The FINRA plan would, for instance, let a hearing officer
impose conditions or restrictions on the activities of a respon-
dent member firm or respondent broker, and require a respon-
dent broker’s member firm to adopt heightened supervisory
procedures for such brokers, in some cases.
The regulatory group also wants to require member firmsto adopt heightened supervisory procedures for statutorilydisqualified brokers during the period their eligibility requestis under review.
BD execs, though, overwhelmingly say that dealing withreps with troubled regulatory records, or so-called “bad brokers,” does not keep them up at night, 88%; nor does the regulation of digital assets, 94%.
12 Do FINRA exams/audits/tracking in these
areas keep you up at night?
10 What issue most keeps you up at night?
11 What task is most challenging for your advisors?
Privacy & CybersecurityReg BI Compliance
12b- 1 fees and revenue sharingCash management/bank sweep programsHiring/supervising associated persons withproblematic regulatory histories (“bad brokers”)
31.5% Adding new clients and new assets
31.5% Coping with compliance demands
23% Dealing with volatile markets
11% Deciding on the optimal business model
3% Keeping up with technology and robo services37%