Advisors look to technology for compliance solutions

Because fund dealers are constantly concerned about the possibility of an MFDA audit, compliance is consistently on the tops of their minds — and on their advisors’ minds. But compliance can be an expensive proposition, and as such, firms are increasingly looking at new technologies for cost-savings.

Getting the technology right can be costly, with some financial planning software running above $3,000 annually. “One of the key things going forward is going to be the efficiency of managing compliance,” says Richard Binnendyk, executive vice-president of Toronto-based Univeris Corporation, which has 15,000 practitioners using its wealth-management platform at 23 financial institutions.

Univeris sees compliance as the main marketing tool for its platform, which was most recently updated in June following earlier upgrades last year.

The compliance component of the Univeris operates in two venues, Binnendyk explained during a recent demonstration for Advisor.ca.

When an advisor keys in a transaction, the online rules engine runs through a series of up to 70 dealer-selected rules, including client suitability, advisor licensing, and override privileges when the program blocks a trade that appears to contravene the rules. The dealer controls the weighting of those rules as the software processes — or blocks — a trade and the number of fields in areas such as the know-your-client component.

The reporting function allows the dealer’s branch manager or compliance officer to review the trades and the match between the proposed trade, as well as other factors such as investment objectives and risk tolerance, whether the KYC file has been updated for all of the client’s plans, registered or non-registered, or handled by the advisor. The software checks the risk rating of the investment. Sources used include information from researchers such as Morningstar Canada. “It’s all checked online as the trades are placed,” Binnendyk explains.

The reporting function provides full information on the relationship between the rules and the trade to the branch manager or compliance officer to assist in making an informed decision on whether or not to trigger the override. When processing a trade that apparently contravenes the rules, the software selects from several reactions: stop order, warning or request for override by the firm’s designated official.

However, a caveat must be mentioned. The selection of rules and weightings in this and other software platforms provides consistency across a dealership but leaves no room for advisor initiative, according to Gerri Sefi, an independent compliance consultant and president of Toronto-based Phoenix Enterprises. “They are absolutely powerless in many respects because they use the system provided by the dealer,” she says. “They can’t proactively do anything with the system.”

During the demonstration, the software stopped a trade because the advisor was not licensed in a hypothetical jurisdiction and because the risk level associated with the investment did not match the client’s suitability, age and investment knowledge. The software flagged another transaction because the hypothetical client’s KYC had not been recently updated.

Univeris plans to add compliance capabilities for insurance and equities into its wealth management platform for 2007.

While a wealth management platform ensures an advisor’s compliance, telephone recording procedures and contact management software provide proof of compliance, commonly referred to as compliance cya (in joking parlance).

For contact management, Don Macfarlane, a Thornhill,Ont.-based CFP, has moved from other programs to GoldMine, which he considers more suitable for serious note-taking. He views this function as increasingly important to store date and time-stamped notes referring to telephone conversations with a client, emails, letters and other communications. This function would enable him to pull all records of all contacts with a client quickly in the event of a complaint. “I can prove I’ve done my due diligence,” he says, adding that possible scenarios include older clients with questionable memory and those looking for someone to blame when the market value of their investments falls suddenly.

However, the downside of increased use of technology may present a potential conflict between compliance regulations and privacy laws, Sefi suggests. Privacy laws forbid retention of information longer than necessary. Meanwhile, MFDA rules require retention of client information for seven years. The two obligations do not appear to operate in tandem, she notes, pointing out that while MFDA requirements are simply rules, privacy legislation is federal law.

Al Emid is a Toronto-based financial journalist

(07/26/06)