This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
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I have a suggestion.
I am not optimistic this change will ever occur, but it’s worth asking why not.
I hear a lot of brokers explain why they are unsatisfied with their current firm or affiliation model.
A common theme is frustration with the constraints of their compliance department. (I previously wrote about how you can fire your compliance department.)
I often point out that a challenging compliance department is usually not a firm-specific but a structural problem.
Imagine being the chief compliance officer at a broker/dealer with 10,000+ representatives. Your job security and future career advancement are based on your ability to limit risks for the firm. You’ll be first in line for the bureaucratic firing squad if things go bad.
You might have the most well-intended, consumer-friendly mindset, but structurally you are tasked with corralling 10,000+ brokers.
Thus, the race to the bottom, by “managing to the lowest common denominator.”
A veteran broker with 30+ years’ experience with a flawless compliance record is constrained by the same guardrails applied to a new broker with little experience.
This approach to compliance is nearly uniform throughout the broker/dealer model.
Here’s an idea: What if a broker/dealer tiered their approach to compliance?
Imagine if there were two compliance tiers at your firm.
The “base” tier is exactly how your firm manages compliance now. I’m not suggesting anyone should get “punished” with a harsher compliance apparatus. Everyone defaults to this compliance tier, as they do now.
You then implement a second “experienced” compliance tier.
This tier has the same black-and-white compliance rules as the base tier does. If a regulation says you can’t do X, it doesn’t matter which tier you’re in; you will not be able to do X.
But what about where the firm has the flexibility to interpret a regulation and implement it based on the profile of their brokers?
Consider a broker I worked with previously. He was with a large broker/dealer. He wanted to make videos as a business development tool to attract new clients. No (black-and-white) FINRA rule says a broker cannot make videos. Likewise, this broker was long-tenured in the industry and would be responsible in the messaging he used in his videos.
He went to his compliance department to ask permission. They acknowledged he would be responsible with his messaging and acknowledged there was no regulation preventing him from doing so, but if they said “yes” to him, they would have to say yes to the thousands of other brokers at his firm. They admitted they had no way (currently at least) to manage that. The result was his request was denied.
He was an experienced, tenured, and responsible broker asking to do something within regulations. Yet, his request was denied due to his firm needing to manage to the lowest common denominator.
What if, instead, his firm had implemented a tiered approach, as I’m suggesting here?
Brokers who meet a certain profile would be elevated to the “experienced” tier of compliance. Under this tier, they are afforded more flexibility than the “base” tier. Perhaps making videos would be an approved activity at the “experienced” tier level.
Any compliance policy that is not a black-and-white regulation should be considered for a more flexible implementation at the experienced tier.
Consider the various policies at your firm and where there might be an opportunity to tier how they are applied. Consider how that would improve advisor satisfaction.
Again, I’m not suggesting stricter compliance policies be forced on anyone. The “base” tier is the same tier being universally applied now. I’m suggesting there is an opportunity to increase flexibility where warranted.
There are two challenges with this, though.
What criteria should determine if a broker is in the “base” or “experienced” tier? Should it be based on tenure in the industry? Tenure at the firm? A clean CRD? Investment style?
There is no easy answer to this. Some brokers will inevitably fall on the “base” side of the line, feeling they are worthy of the “experienced” bucket. Feelings will be hurt.
Yet another complication is how do you manage teams with differing variables involved amongst the team members?
I do not have the answer on how best to structure this.
There are increased logistical challenges with implementing a tiered approach. Compliance systems would have to identify which tier a broker falls in and apply policies accordingly. Considering many compliance programs are based on decades-old legacy ways of doing things, implementing a two-tier approach would be no easy undertaking.
For these reasons, it is unlikely any broker/dealer will implement such an approach. Not because it can’t be done, but because there won’t be an appetite to do it. After all, what chief compliance officer will risk their career on it when the lowest common denominator approach is begrudgingly accepted industry-wide?
Sometimes hard things are worth doing, though.
How would you implement a tiered approach?
Brad Wales is the founder of Transition To RIA, a consulting firm uniquely focused on helping established financial advisors understand everything there is to know about WHY and HOW to transition their practice to the RIA model. Brad utilizes his nearly 20 years of industry experience, including direct RIA related roles in compliance, finance and business development, to provide independent advice regarding how advisors can benefit from the advantages of the RIA model.
Read more articles by Brad Wales
This is the latest installment of a regular column to answer questions from advisors who are considering transitioning to an RIA model. To see Brad’s previous articles, click here. To submit your question, please email Brad here.
