A new study to be released in November examines the challenges faced by broker-dealers as they strive to meet compliance objectives and oversee sales practice management, and looks at a number of best practices and benchmarks as a way to help them meet their goals.

The study, titled Broker-Dealer Sales Practices Oversight: Secrets of Their Success, commissioned by Pershing’s Albridge Solutions from Beacon Strategies, LLC, looked at 70 BDs and how they process sales and compliance procedures and documentation. It also evaluated regulators’ responsibilities and the direction in which regulation is headed, and evaluated the different perspectives of the two groups.

The results included a “Top Five” list of challenges facing BDs today, as well as best practices in leading firms and ways in which BDs can advance.

The percentage of firms that ranked each challenge as most  important:

  1. Sales practice monitoring    79%
  2. Regulatory change              73%
  3. Suitability review                  71%
  4. Product education               64%
  5. Operational processes        54%

According to Mark Butler (left), managing director at Pershing, in a phone interview with AdvisorOne.com, there were two main reasons for conducting the study: the fact that many BDs are not highly automated, and thus devoting more time and resources to processes that can be streamlined, and the regulatory environment in which regulators expect more of BDs.

The need to improve processes that are predominantly manual and to improve the audit process and surveillance of sales, he says, can contribute to a company’s bottom line by cutting the amount of time required to perform these functions and making them more foolproof. “We took a look at how firms were reviewing trade blotters,” he says by way of example, “and firms without automation

would spend 3½ hours [on the task]. With automation [it can take] 45 minutes.” He points out that over the course of a year, such time savings are significant, and companies don’t need to add staff to scale their businesses—or can repurpose staff who formerly spent so much time on such functions to more value-added work.

Chip Kispert (left), managing partner at Beacon, said in a phone interview they were “frankly amazed that less than a third of the BDs we surveyed were using automation for compliance surveillance of their investment professionals.” Similar inefficiencies were noted in siloed systems, incompatible systems, and eyes-on review of documentation. Suitability review, he points out, is not just at the time of sale, but ongoing. “How many of these BDs are using manual processes to review?” he asks. “How consistently will they be able to review securities, portfolios, etc, for the client when down the road they’ll have to look at everyone’s portfolios ongoing?”

BDs need to take a look at how they do business, says Butler. “Take stock of what you have and what you’re doing with it,” he advises; “get some third-party validation around what you do, and how it compares to the rest of the industry.”

Benchmarking against best practices is one way a BD can do a self-evaluation, and such an evaluation—perhaps with the assistance of a consultant—should only take a few days. Then the question becomes how to better the way things are done, and this can be a tougher question to answer; depending on firm size, cost may be the driving factor in how far a BD goes along the road to automation.

Advisors are part of the process, too. Says Kispert: “One of the things we’re seeing is a need for cooperation between advisors and BDs. If you look at how a lot of business is being done at an independent or an insurance BD, they type applications. The advisor, paraprofessional or team will pull the application off the Web and fill it out manually. Advisors need to participate and put data into systems at their level, versus having that data come into the BD manually and then be entered manually by the BD—which will drive errors, duplication, and similar problems.”

Companies that can “get their arms around the data” will be ahead of the game, says Kispert. “They’re ahead of the curve, with . . . more functionality—a surveillance system, instead of the first line of defense being eyes-on manually, now the first line of defense is electronic, and it flags transgressions or [sends] cautionary notices. Compliance officers can look at it and say, is this something we should get involved in. When you overlay automation, you’ll be more efficient and more thorough.”