5 Compliance Approaches That Chase Away Advisor Talent

In this environment, overreaching compliance, policies and processes replace sound judgment and common sense. When a substantial producer with 30 years in the industry and a clean compliance history calls and shares a story of being treated like a child by compliance, lowest common denominator culture is typically what surfaces. In this case, his compliance department had sent him a "letter of education," which noted that "next time" he would be fined. The letter was sent despite the fact he had done nothing wrong. The advisor referred to these communications as "Nasty Grams," and he was furious over such demeaning communication.

This behavior can be invasive and destructive. Here are six indicators of broker-dealers with lowest common denominator cultures:

• Instead of doing only what the Financial Industry Regulatory Authority requires, the firm institutes additional policies, procedures and paperwork that go well beyond FINRA requirements. This results in many layers of bureaucracy, which can make getting needs such as compliance approval on marketing material painfully slow or limited to only the most generic marketing concepts.

• Committees or groups determine decisions, with no one really taking ownership, which is a way to avoid accepting risk and accountability.

• All advisors are treated as if they are high risk, rather than differentiating risk levels through a common-sense litmus such as compliance history and experience. In these environments, the advisor is a necessary evil in the eye of management: "We like your revenue but not your potential liability."

• The higher quality, energetic and ambitious people are leaving, while those remaining are akin to checked-out urban public school teachers on tenure.

• The culture is consumed by a fear of failure, resulting in hyper-defensive behavior.

The most common segment to the lowest common denominator mentality historically has been insurance-owned broker-dealers, which by their very nature are overtly risk adverse. However, as FINRA has drilled down on many aspects of our industry with corresponding upticks of fines, the financial stress of broker-dealers has spread, and along with that stress comes a tendency to fall into lowest common denominator compliance.

Egos Gone Wild

Many advisors that come to us discuss clashes with compliance staff where their inflated egos escalate conflicts well beyond what is necessary. These encounters are not limited to compliance, and can involve other members of upper management as well. An advisor I had placed years ago recently contacted me about his interest in buying books of business. While commenting on the firm he was currently with and why he had left the prior firm, he explained an uncomfortable and unnecessary encounter he had with a member of upper management. He had submitted a stock trade an hour before trading closed and the broker dealer failed to execute the trade until the next day. During overnight trading, the price went down a dollar, which resulted in a substantial loss to the client. A non-compliance person in upper management blew up at him, escalating a situation that never should have escalated, with name-calling and accusations of lying. The advisor explained that there was nothing to argue about because the trade time was documented. Despite that, the person in upper management went on a tirade and the relationship between the advisor and the broker-dealer was severed.  

The Parental Management Style

K. Palmer Hartl, an independent consultant to businesses and nonprofit organizations says, "Far too often managers operate psychologically like parents and their employees function like children (control freak managers are frequently guilty of parental management). The consequences of this are that many American businesses are not realizing the full potential of their labor force so creativity and productivity suffer."  

Regarding parent-type managers, Hartl explains, "They make too many decisions for those who work for them. Just count the number of emails they receive. This style of management means bosses can use their power status to intimidate others and demand conformity and obedience."

For employees that function like children under parental management, Hartl says they seek and ask permission for almost any action, especially anything that could be deemed controversial or out of the norm. They rarely take creative risks and often operate from survivor mode, doing little to distinguish themselves or call attention to themselves. They spend an inordinate amount of time worrying about the security of their situation, wondering, "Does the boss still love me?" Parental management applies to anyone that heads a department and not limited to the president of the firm. Compliance-driven broker-dealers quite frequently have this management style permeate their work environment.

When a compliance staffer is performing an annual audit of an advisor's office and they seem driven to find something wrong with the books and records of the advisor, chances are good that the chief compliance officer (CCO) is a parent-type manager and the staffer is his child, hoping to please the CCO with something to report from their audit.

The real tragedy for compliance departments and management in all of these circumstances is they often lack self-reflection, rarely even realizing that there is a problem – until of course it is too late and their best advisors head to the exit door.