My Comments to the Crowd at the NAIBD Technology Conference
I have a story – I woke to a surprise on Monday morning. Having played the late hockey game on Sunday I slept in beyond my usual 630am wake-up call. At 730am, when I did actually rolled out of bed and checked my blackberry, there was an email from one of my good friends, Marshall Levin. Marshall is the General Manager of Broker Dealer Solutions Group at Broadridge. They are also the Platinum Sponsor for this event.
Well, in his email Marshall explained that he could not make the trip to Santa Monica. Unfortunately, a combination of sudden “must” obligations kept him away from what he would rather be doing, which is spending time with you discussing the challenges facing broker-dealers So he asked if I would pinch-hit for him in making a few opening remarks.
Marshall thought that I could add a few minutes of value to your day. My company Beacon Strategies, LLC is an Industry Strategy Group that is dedicated exclusively to the broker-dealer channel. Our services cater to firms that are interested in better understanding their industry, peers, and themselves.
The topics that I am choosing to spend a few minutes on are data and automation with a side of compliance.
Over the past few years I have worked with a number of you. I have also worked with firms like Broadridge. Over the past two years I have worked at understanding broker-dealer compliance needs, and how firms view and manage those oversight responsibilities.
To me, compliance has to be addressed. And it should be seen as an opportunity for firms to improve their understanding of their clients’ needs and streamline their business processes all the while meeting regulatory demands.
In the last twelve months I have traveled over 45 weeks. During those weeks we have spent time with BDs ranging from 150 reps to well over 2000 reps. We have also spent time with solutions providers that are really working to solve complex challenges that impact compliance oversight.
What I have heard and seen is that the implications for broker dealers are huge. Firms are already struggling to keep up with existing regulations. Manual review wins the day in many firms today. And forthcoming changes could and will stretch the resources of some firms to the breaking point.
For many broker dealers the burden of compliance is a serious threat to profitability, and for a few its about survival. But at the end of the days firms have no choice but to comply. Over the past few years, regulators have shown that they are ready to impose heavy penalties on firms that fail to comply. What’s more, regulators are active in “naming and shaming” firms, publishing details and sending out press releases to relevant publications. The resulting publicity can seriously damage firms’ reputations and drive away clients. In some cases, companies have been banned from doing investment business for failing to comply.
But there is also another side to compliance – it can also be seen as a business opportunity, prompting firms to build better relationships with clients.
So What Can Be Done? Let’s Start with Data.
The most critical step a broker dealer can take to help ease the regulatory burden is to first understand and then wrap their arms around the data needs as they apply to your broker dealers. Areas that we are specifically looking at are Document Storage and Rich Client, Transactional, Position, & Securities Data.Getting your arms around these areas will save you time with regulators as well build efficiencies within your BD.
· How much does it cost when senior level folks are digging for data when regulators are on-site.
· Finding misfiled documents costs over $125
With these things in mind look at partnering with vendors whose core competencies are managing these specific aspects of your BDs businesses. These types of solutions help build a more standardized, uniform basis of client information.
Moving Forward
Today, compliance is seen as a barrier – a hurdle that must be overcome. But as I mentioned previous, it is also an opportunity. If BDs get their arms around their data, then they can embrace automation and shrug off the “old” traditional ways of doing business that are reducing margins day in and day out.
Automation that can allow BDs to utilize business logic based technology can to be proactive in their compliance oversight allows. Going proactive is a change from the tradition BD that reacts to crisis. So now automation will drive review of customer suitability and representative oversight. And the great thing is that today we are working with firms that through automation are now proactive rather than reactive. An added benefit is that these firms are better managing their growth of Compliance with less staff.
The following quote emphasizes which way compliance is going from the regulators perspective. “Under the new exam program, more sophisticated risk modeling will drive how often we examine a firm—and help us determine the scope and depth of that exam, as well. We’ll be able to replace the highly manual, on-site compliance reviews that we currently perform, with automated reviews. The technology we plan to implement will give examiners extensive data and analytics...” Mary Shapiro, CEO, FINRA, March 14, 2007
And we have seen success stories where upon regulators learning of automated rules based systems and workflow capabilities, on-site visits have been shorter in duration. This is both from a deliverable standpoint and accepted logic.
The other area of focus is representative data input. When the reps and or their assistants add data your will get better quality. This fact was recently validated by a Pershing commissioned Moss-Adams study. We see firms whose reps and assistants are inputting data reducing the data entry needs in the home office. We see that these firms have better data, with fewer errors. We are also seeing that firms that are reducing their NIGOs by over 25%, as well as reducing their cost of applications from over $80 to less than $25.
Broker Dealers need to take hard looks at automating their:
· Account On-Boarding, and
· Compliance.
Firms today have two solutions, either increase their brokerage business or replicate how clearing firms do business. Rich data and solid automated process are the mandate for today’s broker dealer, not tomorrow.
In closing Marshall did ask me to mention that Broadridge Broker Dealer Solutions will be rolling out their rules based compliance service bureau over the summer. This service bureau will leverage their Investigo rich data model in partnership with Oracle-Mantas Compliance Scenarios.
Thank you for your time and enjoy the rest of the day.