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The Great Broker-Dealer Chasm of 2017


The Great Broker-Dealer Chasm of 2017

Written by: Tom EmbrognoDocupace Technologies

All industries evolve and the Financial Services industry is bracing for a tidal wave of change that is over twenty years in the making. The applicability date for the DOL Fiduciary Rule is April 10, 2017. In an industry that has been trying to adopt true digital processing for over two decades, this rule presents a significant push for change and significant challenges for Broker-Dealers, particularly those who continue to rely on home-grown, slow moving legacy systems, and those who have not been successful with transitioning their advisory force to digital processing. With less than eight months left, will firms be able to jump the Great Broker-Dealer Chasm of 2017 or will they fall into the divide?

As unbelievable as it sounds, 40% of firms still use purely manual surveillance systems for compliance review.[1] 

How can an advisor be compliant without being fully digital? How can a Broker-Dealer protect the advisors they support and their clients if all that exists are verbal agreements and a manual paper trail?

Adaptability is the primary determining factor of survival. Those who have already partnered with leading technology firms will just have to make a call to add-on new solutions to keep them compliant. These firms will be able to effectively transition. This is true of this new rule and the all subsequent rulings to come. After all, the DOL Fiduciary Rule will not be the last legislation to come that requires Broker-Dealers or their advisors to modify systems and process.

In my opinion, a non-digital process alone could soon be perceived as negligent by the DOL when it comes to determining client suitability. Let me say that another way: paper & manual process alone will ultimately be non-compliant for suitability. How can I say this so definitively? With analysis of multiple products and strategies being critical to determining product and investment suitability, how can you prove proper due diligence if you do not have an efficient system to capture all client communications and provide the necessary checks and balances, much less access to the most up-to-date information? I don’t believe you can.

In light of the harsh reality of what Broker-Dealers and advisors face, there is a silver lining. Financial technology firms are currently developing new solutions to meet the DOL requirements as well as other regulatory challenges. These DOL solutions must incorporate the DOL’s new requirements with existing client onboarding, data validation and data analysis systems. With these end to end solutions, Broker Dealers will be able to identify and eliminate risk from the front-end, rather than the back-end, which is what has been traditionally done. Broker Dealers and ultimately advisors will not only be able to meet the DOL’s requirements, but they will also be able to capture and know much more about their customer during the onboarding process as well as during the annual review process. It’s time to KYC-B: Know Your Client Better.

New solutions will need a series of interview questions and a configurable rules engine. They will need to identify the retirement-product sale and incorporate the required data elements into the Best Interest Customer Exemption (BICE) disclosure form, including but not limited to product information, client information, compensation disclosures, and other Broker Dealer-specific data fields. This data should then flow seamlessly and securely into the existing back office platform, where the data and forms are archived and ready for e-signature. Data and commission providers also need to allow for exception and compliance reporting post-sale.

Broker Dealers will need to get as digital as possible to solve for DOL. There still may be some manual processes involved because of today’s demographics with advisors and clients, and to that end a solution should accommodate both a digital and manual process.   A platform needs to be socio-technological and envelope people with the digital process by providing all the benefits of digital while still weaving in the ability to do manual process.

I’m excited for this evolutionary period in the Financial Services industry. After all, twenty years of talking about change is now being demanded in 8 months’ time. If you’ve been expecting something new from the same old situation there has never been a better time to reach out for a new solution.

Tom Embrogno is a principal of Docupace Technologies. Previously, he brought to market the first cloud-based SEC/FINRA compliant supervisory and storage system that satisfies SEC rules 17a3 and 17a4. Tom has a strong background in information technology, cyber security and investment banking, allowing him to see first-hand the inefficiencies that are a typical part of the traditional financial services business and the solutions.

[1] “Broker Dealer Sales Practices Oversight: Secrets of Their Success.” Albridge Whitepaper 2012



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