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From Top Dog to Compliance Monkey

My, how times have changed. What Peckham used to do as a manager all by himself takes six people now. While he still has a prominent role in helping advisors build their practices, compliance issues have encroached on many parts of Peckham's job. He's not disputing the need for further oversight he's just frustrated that it takes so much time and keeps him from more productive work with his reps.

My, how times have changed. What Peckham used to do as a manager all by himself takes six people now. While he still has a prominent role in helping advisors build their practices, compliance issues have encroached on many parts of Peckham's job. He's not disputing the need for further oversight — he's just frustrated that it takes so much time and keeps him from more productive work with his reps.

“I think we're doing a better job of oversight and assisting reps and keeping them out of trouble,” Peckham says. “But now, it takes me all day to do a compliance audit, as opposed to 22 years ago, when I could get to three in a day.”

Many branch managers at full-service broker/dealers around the country have found in recent years that their old role as branch manager — the rainmaker, the guy who runs his own city-state as part of a larger b/d — has diminished, as more business decisions are made by headquarters. Cut out of more decision-making, their compliance burden has been increased, so their liability has risen while their stature has declined. Those at indie firms, meanwhile, may have more responsibilities, but they're also stretched in terms of compliance issues.

BOMs have always had a supervisory role, of course, but in the wake of a bear market and various and sundry scandals, Office of Supervisory Jurisdiction managers (OSJs) complain they are treated more as compliance monkeys and less as business strategists. To bring home the point, managers are increasingly finding themselves held responsible for their branch advisors' problems.

“The business environment has changed and has forced people to do things now, where 10 years ago they didn't necessarily sign up to be the compliance police,” says David Kowach, director of private client services at Wachovia Securities.

It's no wonder that when it comes to being a branch manager, a lot of people would rather produce and mind his own business. “For every guy who wants to be a manager, I've heard of some who go back to full-time production,” says Paul Warehall, a recruiter with Esquire Staffing in Chicago.

Decreased authority combined with increased accountability isn't a great recruiting come-on. Neither is lower pay, but that's what BOMs are dealing with now: In some cases, a lot less.

In 1998, the average nonproducing branch manager's earnings were $515,860, thanks to hefty bonuses on top of a salary (around $100,000), according to the SIA. In 2003, that figure had dropped 24 percent to $391,618. Producing managers are feeling the same pinch — dropping to an average $273,202 in 2003 from $318,433 in 1998.

As a result, the profile of a branch manager is evolving. Today, new BOMs tend to be people who enjoy record-keeping protocol or, more generally, supervising the adherence to the various tangle of rules and regulations rather than acting as the head salesmen, called in by reps to help land the big accounts. Ongoing cost cutting at major firms has further exacerbated this trend. Truly, they say, they've gone from chief rainmaker to cop.

I'm Watching You

Some aspects of the branch manager's job haven't changed much at all. They're still responsible for recruiting for the branch, and they're supposed to motivate reps and help them with their practices — to increase revenue for the branch or region's offices.

But in conversations with more than a dozen current and former BOMs, these folks agree that the compliance portion of their job has increased immeasurably, while their responsibilities for P&L in the branch, budgeting for marketing and advertising efforts, and business development strategies have been shifted to the home office. “We're an extension of the headquarters, there to sell the firm's message on a local level,” as one OSJ says.

“Each year, more and more of the P&L numbers were loaded in prior to me doing the budget — there wasn't much say, and I had to live with them,” says one former wirehouse manager, now back in full-time production. “There's not a lot of leadership we could bring to the table.”

Meanwhile, branch managers are finding themselves dinged more often in serious customer complaints: Overall, claims of “failure to supervise” rose to 3,230 in 2003, a 23 percent increase from 2002. Through July 2004, there have been 1,677 supervisory complaints already, on pace for 2,875, according to the NASD.

The liability for firms is thus very high. Producing managers are under close supervision. The notorious story of Frank Gruttadauria — a former producing branch manager at Lehman Brothers who scammed $125 million from clients before turning himself in — certainly has not helped. Neither have stories of reps being fired from firms only after receiving nearly two dozen complaints, suggesting that for a long time, oversight was inadequate at broker/dealers.

At his branch in Cleveland, Gruttadauria had been serving as his own supervisor, with veto power over his compliance director's entreaties. “He's brought up at every conference,” says Marianne Czernin, director of b/d client services at National Regulatory Services of Lakeville, Conn. “Every examiner talks about it.”

That's another reason why the supervisory aspect of a branch manager's job has increased so dramatically. Branch managers interviewed say new duties include email monitoring, increased scrutiny of trades, monitoring suitability of investments made by advisors on the behalf of clients and handling compliance related to the Patriot Act and Anti-Money Laundering Provisions.

Dan Wilhite, who has worked as a manager for more than two decades and currently heads a 45-person office at Smith Barney in Dallas, says he's spending about 40 percent of his time on compliance matters, rather than about 25 percent in the 1980s. Not that he is complaining: The increased phone time with clients is too important, he says, adding that he could never be a producing manager.

“I can't tell you how many clients have said, ‘It's nice to know somebody's looking over my account,’” Wilhite says. “I know more clients today than I did 10 to 20 years ago because I'm in constant contact with them.”

Meeting the Cost Challenges

The increased compliance burden has increased costs dramatically. Pretax profits dropped by 60 percent in the second quarter of 2004, according to the SIA, and while SIA economists say that's a reversion to the mean from the same period a year ago, the fact is that the industry has had only one good year in the last four, and the market hasn't been all that strong this year. Major Wall Street firms are back to hiring brokers again, but that doesn't mean other aspects of the business still aren't in cost-cutting mode. And many smaller b/ds say the compliance burden is crippling.

Denise Reinert, general manager at Pearson Financial in Lake Oswego, Ore., affiliated with Royal Alliance, says the additional duties can't help but hurt profitability — causing resources to be reallocated away from marketing and towards operations. “We absolutely believe in compliance, but we're figuring out how to manage the office, and remain a forward-moving entity and take the hits on the margin that all this has brought on,” she says.

Conrad Pearson, who runs Pearson, which has 27 advisors and approximately $400 million in assets, brought Reinert onboard five years ago and later added a compliance manager as well, because Pearson could no longer handle the duties of oversight while maintaining a large client base. “It's either this or insanity,” he says.

Wall Street has been cutting back, shuttering or combining branches. In 2003, the average large firm (defined as having more than 700 registered reps) had a total 314 branches for an average of 5,007 reps, according to the SIA. That's way down from 2001, when the average large firm had 5,949 reps and 428 branches. While the number of reps, on average, declined by 16 percent, the number of branches declined by 26 percent. That's more reps per branch manager.

“A lot of these guys have more responsibility, but they used to be paid more,” says one branch manager.

The response from large firms has been towards closing branches or combining groups of branches in a process that's frequently referred to as “complexing,” where one OSJ oversees five branches, and is responsible for the compliance and operations issues, while the in-house manager at the smaller branches that are under that one person's umbrella are still free to maintain a book, albeit a smaller one.

For example, Merrill Lynch has three levels: complex managers, associate managers and offices so small a financial advisor remains in charge.

Managers of large complexes are paid well, according to SIA data, but sources at Merrill say associate managers must produce a certain level of annual revenue, or else lose that “associate office” status — and that means a reduction in salary. (Merrill officials were unavailable to comment.) That's happened at other firms as well. Morgan Stanley recently capped branch manager bonuses based on the various goals they're expected to reach for each particular branch. Meanwhile, at a number of firms, producing managers are restricted to producing no more than about $150,000 a year.

Additional Support Needed, Please

Realizing that the branch manager now has an increased number of responsibilities, firms are adjusting how they allocate resources to their branches. Darryl Metzger, director of branch administration of Hilliard Lyons, a regional b/d based in Louisville, Ky., says his firm is indeed moving in the direction of clustered offices, but in addition, increasing operational staff in those clusters so smaller branch managers remain free to produce — and to help others close on new business.

“We've hired a lot of additional series 9 and 10 assistant managers to help them,” Metzger says, noting that the firm, which has about 70 branches, currently has five clusters. “In most of our offices, our branch managers are the linchpin in our organization, and a strong majority are from the community in which they manage so we don't really try to run them off.”

Wachovia has also been conducting an internal project designed to understand what the needs of the next generation of branch managers will be, and how they can function more effectively.

Kowach says the home office will be providing more support for monitoring daily compliance functions, but said this hasn't been implemented yet. It also focuses on how to better implement cost controls — but he's careful to say that managers at Wachovia still have local control of P&L.

Still, Kowach says, the profile of the branch manager has certainly changed, and more support is key to maintaining morale among these underappreciated members of the industry. “We're asking branch managers to be great compliance managers, great administrators, run all the HR projects, asking them to drive FA productivity, and drive them to recruit and run businesses with disciplined cost management,” he says. “And I just think it's a difficult task for them.”

Branch managers at larger firms can live a nomadic existence, moving from a small branch in one part of the country to a larger one as their value to their firm rises. What's changed, however, is that those who look for those jobs are more management-oriented in the first place, rather than a function of the Peter Principal (in which, say, the best salesmen is promoted to a supervisory job he isn't suited for).

Michael Veyette, for example, an office manager with National Planning Corp. in Lakewood, Calif., was an associate sales representative for a time, but says his “comfort level” is being in management, and his b/d has confidence that he has enough sales experience to make decisions.

“We all get comfortable in the shoes that we fill,” Veyette says. “It doesn't mean that people can't cross over lines, but there are some who are more comfortable helping clients and probably wouldn't move into management. I like helping other producers. I like clients just fine, but I'm comfortable working with brokers.”

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