“We talk about avoiding adverse outcomes from regulatory scrutiny, and that’s important and that does cost money. But the other side of things is we have to help our clients build a process that is convincing, and that when FINRA looks in they have comfort and confidence that it’s being managed. So one of the things that FINRA has said and some of our clients have echoed is, being able to respond to a request professionally and quickly with the right data in the right format within two or three days greatly boosts the process.”
The WealthTech Today podcast features interviews, news, and analysis on the trends and best practices in wealth and technology for wealth management, asset management, and related areas. This episode is part of our December focus on compliance. We’re talking to influential industry leaders who can provide technology solutions that help advisors build stronger relationships, improve outcomes, and enrich their clients’ lives. A quick shoutout to our sponsor, the Invest in Others Foundation, please go to InvestInOthers.org, and be sure to subscribe to our show wherever you listen to podcasts so you don’t miss future episodes.
- Why Compliance is Important
- The Most Requested Compliance Feature
- Non-Clearing Broker Business
- Trends in Compliance Analytics
- Monitoring for Investment Strategy Mismatches
- The Importance of Normalizing Data
- Account Automation Tools
- Tighter Docupace Integration
- How Many Is Too Many Compliance Alerts?
Craig: I’m excited to introduce our next guest on the program. It’s Robert McGill, Executive Vice President and General Manager of the Jaccomo division of Docupace. Robert, welcome to the program.
Bob: Thanks. Glad to be here.
Craig: I’m glad you can make it. I’m glad to coordinate this time together. I’m really excited. This month we’re talking about compliance and compliance tools, compliance technologies, compliance processes, everything around compliance because it’s such a it’s a big issue. We get a lot of calls about compliance from both RIA clients and our enterprise wealth management clients. It’s always changing. It’s never the same as firms grow and change, their compliance needs change. And we really want to talk to you about your compliance solution. So I’m going to give you a lot of time to talk about it. But first, could you tell us where you’re calling in front?
Bob: I am in our offices in New Jersey, Central Jersey, just south of New York.
Craig: What town is it?
Bob: Oh, Shrewsbury.
Craig: I just want to let you say that so I can rub it in. I’m in Miami. I’m not in New Jersey for the whole week. So nice. Sorry. So now we can move on from that. So Robert, give us the 30-second elevator pitch for Jaccomo which has been acquired by Docupace and soon to become a division of Docupace. But what’s the Jaccomo compliance tools give us the 30-second elevator pitch on that?
Bob: Yeah, if you just look at the Jaccomo piece, and as you mentioned, we’re part of Docupace, right. So there are compliance pieces of Docupace but if we just talk about Jaccomo for the moment, there are three basic market offerings that we have. We have a data integration tool, we have a compensation processing tool, which is fundamentally not compliance, and then we have a suite of compliance tools. So if we look at the compliance, it’s really the combination of the data integration tools and the compliance tools. The compliance tools themselves subdivided into four chunks, a trade surveillance blotter with integrated alerting, a license registration and license management tool and licensed checking an OFAC and FinCEN scanning tool, and a suite of other pieces that will allow you to manage information around compliance if you will.
Why Compliance is Important
Craig: Yeah, so the question that I think is on everyone’s mind is why is compliance so important? Isn’t it just one big thing that you can deal with with one tool, what’s the deal, why do we need all these tools to handle our compliance?
Bob: That’s really good question. It’s very hot in the marketplace right now. And the reason is that it is a major focus for the regulators. We talk to almost all of our clients every week and we get a sense for what the issues are and the concerns of somebody who’s just gone through an audit or whatever, they’ll usually give us some feedback as to how they used our tools to support that audit. Compliance is relevant because it’s a huge risk. It’s probably the number one existential risk for the broker dealers and investment advisory firms out there today. So it is a C-suite kind of concern, and the issue is firms need to put controls and documented processes in place to manage risk before the regulators come in and force them to do it. So from a standpoint of importance, it’s right up there with generating revenue and managing the operations of the firm. Having compliance under control with a well managed process with the right tools and the right people in place is pretty much a mandatory capability today.
The Most Requested Compliance Feature
Craig: Indeed, and so let’s move on, so we know why why compliance is important. We see that from even the latest SEC fines coming out for a lot of firms not following the compliance regulations, processes and what are some of the trends you’re seeing around compliance? So what are your clients asking for, which of their tools are they using the most, which of the areas of compliance are really hitting the major buttons for these firms?
Bob: Probably the number one thing that we see in the marketplace, people are looking for electronic blotters for trade approval, in particular looking for a blotter that is doing a risk assessment automatically with integrated alerting on a trade by trade basis. So they want their principals to be able to go through review the trades in a comprehensive fashion, but have trades that are high risk or medium risk or low risk, categorized and called out so that they can go through and see simple things like Trade Center in illiquid, low price kind of securities and more complex things like switches, excessive trading, product suitability mismatches, things like that. They need a tool to help them sort through that hundreds of thousands of trades that flow through broker dealer or advisor every single month, so that people are able to spend time managing the risky ones and not waste their time approving the ones that are really routine, if you will. That’s the number one thing that people are looking for out there. And probably number two would be some kind of automated letter generation tool. Allow them to stay in compliance, particularly on the direct non clearing broker business. It’s a major gap for a lot of people that are out there.
Non-Clearing Broker Business
Craig: Can you explain the non-clearing broker business? You mean trust accounts?
Bob: It could be trust accounts, but it’s oftentimes very much simpler than that. So any broker dealer or advisor out there is going to have a section of business somewhere between you know, 5-90% that’s going to run through a clearing broker. It’s typically all the bond option and equity business, but a lot of the package business, the mutual funds, the annuities, etc. is often done direct. Either check it out or through electronic means direct. And when it goes direct, you don’t have any of the integrated toolkits that the clearing brokers typically provide. So if you’re working with an NFS, or a Pershing or Raymond James or First Clearing, there are letter tools that you can pay for and elect to generate your letters. But you don’t have that when you’re working direct. So they’re typically looking for a tool, we provide one, that allows them to manage the pie slice of business that’s not at the clearing broker, whether it’s at Schwab, TD, or direct with DST or DTCC or Dazzle, and stay compliant, generate the 36 month and address change letters, etc. that they need.
Craig: Yeah, a lot of firms forget about these things and forget how important they are, and then think they’ll just throw more bodies at it and solve the problem and then things fall through the cracks.
Bob: Or they hope that their producers are going to do it and some producers do a good job and other producers don’t, so having a centralized well-managed process to stay compliant is important.
Trends in Compliance Analytics
Craig: Yeah, and you need the software to do it. What about other trends? Some of your analytics around breakpoints, can you talk about that and how firms are using your software for that?
Bob: It’s a good entry point. When you look at the different kinds of business models that are out there, different kinds of risk issues bubble to the surface from time to time. Some kinds of things that we’re seeing when we talk to our clients over on kind of the retail or the brokerage side, we see a major focus on breakpoints. So a lot of times firms are looking for a capability to show the regulators that they are checking to make sure the right commission charges are being applied. It’s complicated because when you’re evaluating what should be applied in terms of a load or a commission percent, you need to aggregate assets across an entire household and you need to do it across an entire mutual fund company. And to be able to put that together means you’ve got to have good householding data. A major theme that we talk to our clients about in general is having sound data integration practices that allow you to get value out of the risk alerts that we generate.
Bob: Since we do our own data integration, we have very complete normalized data, which makes the alerts and the risk assessments that we put into our software much more valuable. But to your question, breakpoints in managing and document what should have been charged versus what was actually charged and when they are not the same, having a process to address that is a key issue for almost all of our broker dealer oriented clients.
Craig: I can imagine that that’s something that a lot of firms aren’t doing. They’re just charging, seeing the bills are going out. But no one’s saying well, is this what they should have been charged? Is this the correct bill? We do a lot of billing system analysis.
Bob: Again, they’re trusting the producers, and sometimes the producers get it right and sometimes maybe not quite right. Other things we run into and I won’t I won’t get too detailed unless it makes sense, we actually have a lot of firms that are looking at 529 accounts very careful. In particular they want to understand when the beneficiary gets out of majority when they become a team, and they want to change the registration on that account. And that’s another data challenge because you have to make sure you understand who the custodian is and who the beneficiary is, and what the proper age is for both and when they’re trading to make sure that we alert people, this person’s now 19, you want to go back and fix the registration on this account.
Bob: Another key thing we’re looking at in particular high risk product situations. So almost every one of our clients that does ETF business needs to highlight leveraged inverse ETFs. And it’s again, a challenge to make sure you have the right list of that are leveraged and inverse and what kind of leverage and inverse situation they are. But they have to make sure that people are properly trained and authorized to sell those products and they also want to look at the positions and make sure that certain products that are intended for very short term trading strategies are indeed short term. You don’t want somebody sitting for six months to a year in a product that’s meant to be in place for no more than a week.
Monitoring for Investment Strategy Mismatches
Craig: I haven’t heard of any products doing that. So you mean lots of compliance products check for leveraged inverse ETFs, that’s easy, that’s pre trade compliance, that’s built in program compliance. We built those things at the custodians, or at the portfolio accounting vendors will build programs that restrict programs from buying certain securities, whether they’re inverse ETFs, or commodities, or currencies, things like that. But when you’re looking at short term instruments or short term strategies that are being held long term, how does the software do that?
Bob: It requires really good data, once again. What we do is we bring in nightly positions for every single position for a financial firm. Because we maintain position history, we can tell you what position was held, when that position was opened, and what the value of that position was day by day over time for multiple years if need be. We know what the leveraged and the inverse CUSIPs are. We’re going to look for positions and we’re going to look at the position open date and there’s actually an alert we created for this purpose called the position open alert. So anything that is open more than X days if it’s one of these CUSIPs or has the characteristic of being leveraged or inverse, we’re going to fire off an alert.
Craig: So you just basically subtract today’s date from the position open date, it’s longer than exactly x, you flag it.
Bob: Right. And it’s a good way for a financial firm to go through and make sure they don’t have any stragglers, somebody forgot to close out a position kind of thing could be innocent, but we’ve got to have a control that goes out and says yeah, we’re gonna know if something is open longer than it should be. And at least ask questions and get the proper paperwork generated to justify why it is the way it is.
Craig: That’s terrific. These are things that can save companies a lot of money in fines and a lot of headaches if they had this type of these type of tools.
Bob: The goal is that the compliance people can sleep at night, which is a challenge because there’s a lot of pressure on them these days.
Craig: You’re a stress reduction product.
Bob: Take two Jaccomos and call me in the morning.
Craig: Take take two Jaccomos, it’s better than meditation.
Bob: It’s a lot more work than meditation.
The Importance of Normalizing Data
Craig: Oh, that’s true. So I wanted to circle back on something we spoke about earlier, that you have all these alerts and you have all these reports. But if you don’t have good data, clean data, normalized data, all this is kind of useless. And something we do at my company Ezra Group, we do a lot of data assessments, data valuations for broker dealers, on these types of things. And they don’t really understand why they need to normalize their data, they don’t understand why. So can you explain why normalizing data is important and give us example around trade operations you were talking about?
Bob: Sure. The key challenge here for any of our clients is they are pulling data from multiple sources. So you might have a client that’s got data coming from a clearing broker from advisory custodians like TD or Schwab, from direct sources, etc. Even data that may have come from mergers and acquisitions from a long time ago.
Bob: What the challenge is, is you have to pull it together so that it is integrated all in one place. And the fancy word is normalized, but you want to make it comparable. So, basic stuff like trade operations need to be organized. Some data sources, direct sources may call something a purchase, a clearing broker may call it a buy. Another source may call it a reinvestment or a rebalance, etc. We provide tools to be able to take that information and map it onto one set of trade operations. And that’s critical because a lot of the risk management and alerting is based on the trade operation. Something’s relevant for a a buy but not relevant for sell or an exchange, for example, and you don’t want to miss a trade because it came through as a purchase as opposed to a buy etc. That’s just one of about 20 different things we have to do to make sure that the information comes in is grouped properly.
Bob: Another huge issue is making sure it’s categorized properly. Is it an ETF or is it a equity? A lot of the ETFs come through as equities for whatever reason, the clearing broker, so we have to put in capabilities to reclass them and put them into the categories that make sense for risk management. So having a solid clear integrated database is sort of a precursor to do any kind of capable risk management and it’s a lot of things the risk management software people don’t highlight nearly enough. But our background started in data integration, and we do compensation accounting, you’ve got to get the data right to pay people. We get the data right for that and we get the data right for compliance.
Craig: We talked to some clients about normalization or cleaning up your data sources and they don’t understand why, so we really have to sell them on the results. Well, if you don’t you’re not going to have alerts come out when you think they’re coming out, your reports are not going to match. All these are the things that you can have, you won’t have them if the data isn’t normalized, if your data sources are too siloed, you don’t organize across them, there’s gonna be problems down the road.
Bob: That’s very true. And it’s not sexy, but it’s mandatory. And it’s one of those things we talk to our clients about all the time.
Account Automation Tools
Craig: Another thing I want to talk to you about regarding trends you’re seeing in compliance is your account automation tool. Why is that important and what are firms using that for?
Bob: This is one of the major benefits of us coming together with Docupace. As you probably know, Docupace has the industry leading workflow new account opening tool that’s out there. They capture a ton of information on the way in. Traditionally, that has been a silo separate from all the back office activity that’s in place to do compensation accounting, data integration and compliance automation. And in that case, we are restricted to whatever data flows to us from the data sources.
Bob: When you’re looking at a clearing broker. You’re getting a fairly robust set of information you’re typically getting decent account level suitability information like time horizon, risk tolerance, tax bracket, annual income, etc. But when you’re working with direct sources, you get almost nothing. You know the person’s tax ID, you know their name and address and you know the account number and beyond that, not much more.
Bob: So what we’ve done is we’ve taken the new account opening and workflow tool integrated with our back end so that information flows both ways. We’re going to take data that we have about an investor or an account, and share that with new account opening so that the producer can confirm it, not re-key it, they don’t have to. And secondly, when they fill out that huge client profile, a new account form, we’re going to take all that data and post it into our backend. So now we have the quality of data in the backend that is as good or better than if we had gotten it from say, a clearing broker, but it’s going direct. It’s going check an app or it’s going through an electronic means to a direct mutual fund or annuity provider.
Craig: Those direct accounts are killer, and they seem to cause so many problems.
Bob: They do. It’s less expensive and it provides a certain amount of freedom and sometimes it’s the only way to go if the clearing broker doesn’t handle the product set that you need. But we use our technology, both in new account opening and sort of the back end automation, data integration and compliance automation, to wrap it with the same level of controls and risk management that you would get if it went through a clearing broker.
Tighter Docupace Integration
Craig: So the fact that you’re now part of Docupace means that you’ll have tighter integration with the new account opening process.
Bob: Yes, and not just that because Docupace has a suite of tools that give us brand new capabilities. So we mentioned the new account opening but they also have a very capable 17a-4 document repository. We have a ton of output in our software. So for example, nightly trade blotters, regular reporting, letters that we generate, those can all go into that same 17a-4 compliant document repository. So the synergies are working both ways. Every time we turn around, we find a new way we can put the two products together and provide more value to the industry.
Craig: I think we’re one of the only industries that talk about everything in terms of what the regulation number is, like 17a-4, 529, 401ks whatever the number the regulation happens to be, that becomes the number we call the particular product or thing all the time.
Bob: And there’s new rules coming out all the time with new numbers, etc.
Craig: It’s not helpful, not helpful. One big thing that a lot of advisors care about are 401k rollovers because they get a lot of new business that way, but there’s issues with FINRA that you guys can help compensate for what can you talk about that?
Bob: Because we talked to so many people, we have a sense for what people are concerned with. We have a sense for what’s come up in the most recent audits. We have a sense for what FINRA has published and said, Hey, we’re going to take a look at these. One of the things that is undergoing a fair degree of scrutiny right now or money that’s being rolled over from a 401k into an IRA. It’s a huge source of funds for a lot of broker dealers out there, but when you do it, it has to be properly papered. In particular that have to be advantages, because there are cost implications of moving out of a 401k that may be very low cost and the IRA may be somewhat larger cost. So in order to do it, you have to claim there’s better product offering or we’re able to do something that can’t do in the old vehicle that we can do here. So what we are doing to help our clients with this issue is we highlight trades that are moving information, moving money basically out of 401k into IRAs and other tax protected vehicles so that they can verify that the proper paperwork is in place so that the risks are managed there.
Craig: Nice. That must be a great report for compliance to get a hold of.
Bob: It is. The thing I will highlight here, Craig, is that these are evolving issues, right. So last year, this wasn’t a major push. It’s a bigger issue this year. And if you go back two years there was something else that FINRA was really looking at. We are releasing on average 6-8 new alert types every single year, as we detect that there are new areas of scrutiny or new product types that are coming out etc., there are alerts, risk management alerts that we build and deploy and make available to all of our clients so that they can adopt them if they make sense for their business model. Not every risk is inherent in every business model, but we want to cover off all the risks for an individual securities firm.
How Many Is Too Many Compliance Alerts?
Craig: When you get to a point of diminishing returns when you have so many alerts, how do you know which one to deal with first?
Bob: It’s really good question. One of the things that people have come to us with because it does get complicated, there are a lot of them were upwards of 50 of them. I think we’re at like 45 or 46. What we have taken to doing to help firms, especially firms that need to get started, they’ve come to us and said Bob, I love your tool. I’m not sure how to populate it in which risk I want to manage. Can you give me what everybody else gets? So what we’ve done is we’ve created kind of a baseline. It’s nothing esoteric, but you put the standard set of alert controls in place out of the box, and you will have the 80% solution in place on day one.
Bob: We still need to dialogue and understand if they’re unique concerns or risks in the particular business model and the products that they’re selling, and we may need to tune them a little bit. But everybody needs a large trade alert. Everybody needs a low price alert. Everybody wants to switch alert. So of the 45 or 46 that we offer. There’s probably 18-20 that will deliver right out of the box for somebody so that they’ve got something on day one that lets them get comfortable with the mechanism. And then they can adjust them as they need to. So if they’re getting too many alerts or too few, we’ll tune the parameters a little bit or if they have a unique risk that is not necessarily covered. We’ll cover it.
Craig: I’ll put you on the spot, which alerts are the most commonly triggered?
Bob: I should back up and say we have classes of alerts. So we have alerts that are based on trades, alerts that are based on account, alerts that are based on data changes. But if I just talk about trade alerts, which are the most common grouping, we’re going to look at probably, I would say, large trade switch, low price ,we call it employee trade, but it’s an essence front running. And then maybe excessive commission, roughly in that order. It differs from broker dealer to broker dealer, but if I were to blend them all together and say which of the ones I see most frequently, I would see all five of those at almost every single broker dealer.
Craig: Any of those could cause a fine or some sort of SEC action or FINRA action.
Bob: We talk about avoiding adverse outcomes from regulatory scrutiny, and that’s important and that does cost money. But the other side of things is we have to help our clients build a process that is convincing, and that when FINRA looks in they have comfort and confidence that it’s being managed.
Bob: So one of the things that FINRA has said and some of our clients have echoed is, being able to respond to a FINRA request professionally and quickly with the right data in the right format, Excel is what they typically want or CSV, within two or three days greatly boosts the process. If FINRA sees that a broker dealer is struggling to pull together the information that they’ve asked for, they get concerned.
Bob: Some of what we do is by building all those alerts and making sure that they’ve got a process in place for managing the alerts. But some of what we provide are just super powerful data reporting and extract tools so that when someone says, I need see all the VA trades between the following two dates that were done with the following six providers in the western region, that should be a few clicks for somebody, boom, here you go 300,000 trades. So it’s all part of a holistic approach to enabling a securities firm, to be responsive and to show that they’re on top of things, if you will.
Craig: Another trend you’d mentioned was mid market and smaller broker dealers rolling out automated alerting and surveillance tools.
Bob: I mean, traditionally, this has been something that was addressed at the highest end of the market, and the tools themselves were expensive, they were mainframe and they were complicated. And they required a team to support them, etc. And indeed, we have fed some of those tools with our data integration engine because we did such a good job with data. What we wanted to do was take all that power and make it flexible, and scale the pricing and the implementation costs so that a mid market firm could easily adopt it. It’s something that we’ve done a lot of, we have a lot of experience in both the enterprise and the mid market space, and I would tell you that the people in the mid market space that are using our risk management and trade surveillance tools are thrilled with it. It’s one of those things where they’re like, Listen, this is the very best thing you provide to us. And partly it’s because it’s a cost effective option for them to be able to show their management the regulator’s etc., that they have a tool and a process in place to manage these things. Manage risk, basically.
Craig: That’s what it all comes down to. You can have the tools, but if you don’t have the processes to run them properly and manage them, review them the governance and they’re pretty much worthless.
Bob: Correct. They won’t stand up.
Craig: Bob, I think we’ve just covered everything we wanted to cover. I really appreciate your time. Tell everyone where they can go to find out more information about the Jaccomo soon to be new Docupace, compliance tools?
Bob: Yeah, a couple of sources it start with Docupace.com, it’s an excellent website, it’s got a ton of information. You will see us as Docupace Commission processing and Docupace compliance. The Jaccomo website is still alive as well. It will be for at least a few more months. So Jaccomo.com, those be two great places to get started.
Craig: Awesome. Bob, thanks, you’ve been great. Really appreciate your time.
Bob: All right. Thanks, Craig. I appreciate it.