The ever-increasing regulatory burden: Includes chart

“In the past 20 years, compliance has gone from being a relatively small thing to taking over the retail end of the business,” says a CIBC Wood Gundy advisor in Toronto. “It used to be a five-minute procedure, but you now have upwards of three hours of paperwork to complete.”

Although most brokers understand the increased workload is a result of recent investment scandals, they also say it is a threat to their profitability.

“Our legal and compliance department has been instructed to put up nothing but blockades because the firm is so fearful of being sued. It is a great impediment to client relationships,” says another Wood Gundy advisor in Alberta.

Advisors at Wood Gundy aren’t the only ones vocalizing their frustration with their firm’s compliance policies. Virtually every firm on the Street has its share of grumbling advisors who feel that compliance is getting in the way of doing business. Still, the scores are intriguing: almost every firm’s compliance department rated an 8.0 or higher, and most of the marks were up from the previous year.

The upswing could be attributed to senior executives’ growing awareness of how the current regulatory environment affects their advisors’ bottom lines. With initiatives such as anti-money laundering and the Know Your Client rules constantly changing in the post-9/11 marketplace, the bank-owned firms, in particular, have watched their business structures change over the past five years.

“It’s the number of people in compliance vs the number of people in production. The number in compliance has gone up by 45%, and production has gone down,” says Gordon Gibson, senior vice president and managing director of Montreal-based National Bank Financial Ltd. , whose average compliance rating dropped to 8.3 this year from 8.5 last year. “Compliance, being pure cost, has to be borne by the sales structure,” he says.

Most executives agree that increased compliance expenses are simply a cost of doing business. For growing firms, such as Winnipeg-based Wellington West Capital Inc. , which has 92 licensed reps, this cost has less impact overall. The firm has been able to “bury the expense in our top-line revenue and not have an issue,” says Charlie Spiring, Wellington West’s CEO and chairman. But, he concedes, without a growth-oriented budget, it would be a bigger issue. Wellington West advisors gave their legal and compliance department a 9.6, holding steady from last year.

Tom Monahan, head of Toronto-based Wood Gundy and its 1,400 investment advisors, says his firm is using technology and raw dollars to cope with its increased compliance workload. “We recently launched a client account management system that allows brokers to open accounts online without multiple people having to touch those pieces of paper,” he says. “It’s a big expense, but a firm such as ours can afford to make these investments.”

Many are hoping the overbearing regulations are just a phase in the industry, a pendulum swing that will soon fall back toward the centre and away from scandals such as market-timing and Portus Alternative Asset Management Inc. As Gibson puts it: “Hopefully, we’ll get to an equilibrium point.”

Paul Bourque, however, doesn’t see that happening anytime soon. The senior vice president of member regulation at the Investment Dealers Association of Canada agrees that regulations do change in the face of public controversy. But as for the pendulum swinging back: “I don’t think things are going to change much,” he says. “We are always going to have a very dynamic and changing environment. The history of the regulatory burden is that it only increases.”

Technology and capital spending, Bourque adds, are the best options available to firms and their overburdened advisors for better managing regulatory requirements.

In the meantime, advisors face mountains of paperwork and relationships with compliance officers that are sometimes “adversarial.” When asked to comment, most advisors jokingly refer to their compliance offices as the “business interruption department,” “business prevention department” or “the pain-in-the-ass department.”

Seeing this attitude as another threat to productivity, the investment dealers are rushing to mend fences. Toronto-based Raymond James Ltd. uses “preventative maintenance,” according to national sales manager Terry Hetherington

@page_break@”We make it a very consultative process,” he says. “We encourage our advisors, if they have any questions, to pick up the phone and talk to any of our compliance officers, including our chief compliance officer.”

A similar practice is encouraged at Toronto-based ScotiaMcLeod Inc. , where Hamish Angus, head of the full-service brokerage, reports good two-way communication between brokerage and compliance staff. Advisors there rated the legal and compliance department an 8.9 this year, up from 8.5 last year.

Although such initiatives may have helped both firms increase their scores in this year’s Brokerage Report Card, advisors and regulators still appear to have a love/hate relationship. But for every advisor who complains about compliance, another comments on its necessity.

The situation is perhaps best described by an Edward Jones advisor in Toronto, who says: “It’s a pain in the ass, but a necessary pain.” IE