Remote work? Not for the vast majority of firms these days, survey says

July 20, 2023 3:53 PM

Nearly 7 out of 10 advisory firms are back in the office either full time or on hybrid schedules, and advisors are still nervous about the SEC's new marketing rule.

So suggest the results of the "2023 Investment Management Compliance Testing Survey" released this month by the Investment Adviser Association and the consultants ACA Group and Yuter Compliance Consulting. The poll had compliance professionals at 581 advisory firms answering questions throughout May on a wide range of wealth management topics.

Among the respondents, slightly more than 67% said that they are back to being in the office either full time or on a hybrid schedule following the widespread adoption of remote work in response to the COVID-19 pandemic. By contrast, only 4% said they have no plans to return to the office.

Ryan Salah, a partner and financial advisor at Capital Financial Partners in Towson, Maryland, said he and his four colleagues returned to the office as quickly as they could in late 2020. Part of the reason was that moving back made it easier to comply with regulations on record keeping and tracking official communications.

But mostly he and his colleagues missed the benefits of working together in close proximity.

"When you are not within walking distance of each other, certain things start to dissipate," Salah said. "And that goes for the camaraderie aspect of it. We felt more comfortable being all together."

In addition to remote work, firms had concerns surrounding best execution, the SEC's new marketing rule and compliance issues. Scroll down our slideshow to see more.

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Remote work

Of the more than 6 out of 10 firms that have returned to the workplace, roughly 4 said they were back to running things as they did before the pandemic. Aaron Pinnick, a research leader at ACA Group, said he takes that result to mean these firms are more or less insisting their employees be in the office five days a week.

The remaining firms said they had made significant changes to their operations since abandoning remote work.

"Most of them probably have a hybrid model, maybe three days in the office and two days from home," Pinnick said.

Slightly more than 16% of the respondents said they are in the midst of a transition back to the office, and nearly 3% said they were unsure about their plans for going back. At the same time, more than half said they have employees who continue to work remotely either full or part time.

Only about 17% said that all of their representatives who had once done their jobs from a distance in the pandemic were now back in the office for the entire work day, and only 1% said they had remote employees who were in the process of coming back full time.

Salah said only one of his four colleagues now works a hybrid schedule. All the others lean toward being in the office as much as possible, a preference enabled by the fact that most of them live within a few miles of the workplace.

Meetings with clients are also done in person as often as possible.

"We always give them the option," Salah said. "But, I will say, I think especially with newer relationships, with newer and prospective clients, we want to have them in the office."

Jessica Hultberg, a financial advisor at Keeler & Nadler in Dublin, Ohio, also attested to the benefits of working with colleagues in person.

"There is lack of conversation amongst teammates when everyone is working from home," she said in an email. "The flexibility to be able to work from home is a great option to have, but I would not want to be a full-time work-from-home advisor, ever."

Nearly 70% of the respondents meanwhile said that the COVID-19 pandemic had a minimal effect on their advisory businesses.

Marketing rule

For the third year in a row, respondents identified the Securities and Exchange Commission's marketing rule as the "hottest" compliance topic now before them. In general, the regulation allows for the use of testimonials from current clients and endorsements from third parties like celebrities and social media influencers; adopts new standards for reporting the performance of past investments; and places firms under a greater obligation to police their promotions for false or misleading information.

The rule took effect in May 2021 but gave advisors 18 months to come into compliance. Carlo di Florio, the global advisory leader at ACA Group, said regulators applied a lighter touch in the initial days of the rule. Now, though, they have made it clear they expect strict compliance.

Nearly half of the respondents said the marketing rule had come up in their most recent SEC examinations. Di Florio said one thing regulators are looking for is supporting evidence for any claims of fact made in marketing materials.

"They are going to take your marketing materials and circle anything they think is a material statement of fact," di Florio said. "And they are going to ask you to let them see the records that substantiate this statement."

The survey respondents attested to taking a variety of steps in response to the rule. Almost 95% said they scrapped or revised their previous marketing policies, nearly 78% said they put specific employees in charge of reviewing materials, and nearly 56% said they were making sure marketing statements were being logged and tracked.

Almost 1 in 10 said the new rule had prompted them to make greater use of social media posts, whereas less than 5% reported a greater reliance on testimonials by former clients and endorsements by celebrities or other third parties.

Advisory firms who do use endorsements and testimonials often highlight praise for their past work in attempts to solicit new clients. Among the survey respondents who used the rule to drum up prospects, 60% reported getting solicitation help from their broker-dealers. Nearly 14% said they turned to pension consultants and 12.8% to banks. Only 4.8% said they were using endorsements from clients.

Nearly 78% said they had adopted written policies governing payments for third-party solicitation, and 43% said they had designated specific employees to oversee solicitation agreements.

Besides the marketing rule, the other "hot" regulatory topics identified by survey respondents were cybersecurity, the surveillance of employees' electronic communications and investing according to environmental, social and governance principles, or ESG.

Best execution

The SEC announced plans in December for its biggest overhaul of market regulations in more than a decade. Among the many reforms aimed in large part at reining in the advantages enjoyed by high-speed traders is a proposal to apply a so-called best execution standard to investment advisors.

In general, the rule seeks to ensure advisors are doing their utmost to find the best deals for investors on transactions involving stocks, bonds and other securities. The standard looks not merely at price but also the speed of the sales and the ability to buy the number of securities a customer wants.

Brokers already fall under a best execution rule enforced separately by the Financial Industry Regulatory Authority, the broker-dealer industry's self-regulator. That means advisors who route securities transactions through brokerage houses already have to worry about whether they're achieving the best possible deals.

Nearly 74% of the respondents said they do best execution reviews for trades involving securities — meaning they do some sort of follow-up to try to make sure brokers are helping them obtain best execution for client transactions. Nearly 40% said they do the same for investments in bonds and other fixed-income securities.

About 6 out of 10 said they do their follow-up using an approved list of brokers that they periodically review. Nearly 45% said they take close looks at brokers' in-house commission reports, nearly 34% said they try to evaluate the execution quality of their trades using external benchmarks, and nearly 33% said they try to negotiate commission rates with brokers.

Di Florio said regulators are also looking out for conflicts.

"Brokerages may be giving gifts or providing other benefits to get execution directed to them," he said. "And that may not be in the best interest of the advisor's clients."

Cost of compliance

About quarter the respondents pegged the cost of complying with industry regulations at between $250,000 and $500,000 a year. The second largest group, comprising slightly more than 19% of the respondents, put the figure at between $100,000 and $250,000. And another roughly 19% said compliance costs between $500,000 and $1 million annually.

Only about 4% said the regulatory expenses had put them "materially over budget." Nearly 60% said they were not over budget, and nearly 36% said they had no compliance budget.

The firms taking the survey ranged in size from having more than 1,000 employees to having five or fewer. About 40% said they had $1 billion to $10 billion in assets under management, nearly 16% had less than $500 million under management, and slightly more than 11% had between $50 billion and $1 trillion.

Nearly 50% of the respondents said they work with high net worth individuals with a typical account size of $1 million or more, and 32% said they work with investors with less. Nearly 59% said they also work with private funds like hedge funds and private equity funds.