The SEC contacts you to notify you of an impending audit. They send their usual letter of instructions indicating the types of files they'll want to review. The problem is ... you don't know what specific clients they'll want to see information for-nor do you know precisely what they'll ask to see for those clients.

The gist of this problem is that today's SEC audits require the advisor to be quick on her feet. She must be able to pull up exactly what the auditor wants to see-no more and no less.

Paper filing systems don't lend themselves well to this kind of flexibility, but document management systems do.

"With the growing burden of compliance and the heavily regulated nature of the financial services industry, advisors are spending enormous amounts of manpower to keep their records in compliance. We come in and help make them more efficient," says Zaheer Master, a technology consultant, reseller of the Laserfiche (www.laserfiche.com) document management system and president of Accelerated Information Systems (www.aisww.com) in New York City.

Master works with advisors in the New York metropolitan area and around the country.

"Some advisors are just starting out and don't want paper; we help them set up a document management system from day No. 1. Others have a backlog of files, and we help them do the conversion from paper to digital files and system setup. Some others are dually registered, so we help them set up systems in a compliant fashion too, separating files so they are compliant on both sides."

What advisors are installing when they purchase a Laserfiche document management system is "Avante" version 8.0, which brings them such features as audit trail tracking and, optionally, a Web client so they can work offsite if they like. Most features are modular.
Says Master, "The base version gives you scanning capability, metadata [the ability to add key information about documents for later retrieval], the ability to import electronic files [for example, e-mails, correspondence and PDFs] and Quick Fields capture, which automatically recognizes documents, fills in key metadata fields and then files them. This helps speed up 'back file' conversion and get documents into Avante quickly and easily."

He adds, "Advisors typically purchase the software, and we set it up, configure their system and set up work flows-such as final approval of invoices before payment. On the capture side, we can set up auto-filing whereby an existing paper file is scanned in and Laserfiche is configured to find keywords and identify files automatically, and then auto-file the resulting document. These configurations are, of course, specific to each individual advisor."

As a reseller, Accelerated Information Systems charges for the purchase and installation of Avante according to how many users there will be, what optional features may be purchased, whether the advisor needs help capturing documents into the system, the condition of his files (for example, heavily stapled items might run eight to 15 cents a page on capture) and the training requirements. All of this, for a three- to ten-person office, will generally run about $5,000 to $10,000, including all services, says Master.

How does Accelerated help its advisor clients during audits? Says Master, "The advisor handles the audit himself but we're here to provide technical services as needed. If a question arises during an audit that we can help with, we're here to support the advisor. Let's say the auditors are in the office and request the last three months of files; we'll show the advisor how to set up a search or export. Of course, if the advisor has been using Avante for a while, he'll know what to do. The less experienced advisors we'll help remotely, as needed."

John Abusaid, a partner with the advisory firm of Halbert Hargrove in Long Beach, Calif., uses Avante. "We had FileNet prior to Laserfiche," says Abusaid, "but adopted Laserfiche as a better and easier solution, and are presently upgrading to Avante 8.0."

Interestingly, Halbert Hargrove hasn't been audited by the SEC since installing Avante in 2002. But the firm is prepared, nonetheless-it conducts mock audits with its compliance consultant MarketCounsel in Englewood, N.J.

Says Dan Bernstein, MarketCounsel's director of professional services, "We don't call our services 'mock audits.' We call them 'compliance verifications,' because we're not acting as if we're examiners approaching an audit from an adversarial perspective." Bernstein says the compliance verification consists of one or two days in which his team looks at what the advisory firm is doing well or not doing well. He characterizes the service as another version of the firm's consulting services.

"It's a way of testing whether what they have in place is working. We start off with a typical SEC request letter tailored to the advisor based upon his firm's risks and business plan. Then we spend some time helping the client be as effective as possible in demonstrating compliance. If we find they're not doing something properly, we go into a consulting role and help them fix the problem. So more of our work is done after the verification is completed."

What kinds of problems does Bernstein typically see?

"There's not one common problem affecting all firms, but rather problems usually center on simple stuff the advisor is doing but not properly recording. For example, every advisor must update his code of ethics quarterly or annually, but many can't find the document when asked for it by a regulator. They literally can't produce what's sitting right there in their offices."

Another example, says Bernstein, is the audit review of the advisory firm's advertising and/or general communications.

"They must be able to show they have a good supervisory system in place and they're reviewing communications going out to clients," he says. "Further, even if they do have good procedures in place, are they doing a good job of monitoring communications to make sure reps are promising returns or gathering testimonials?"

Abusaid says his firm last went through a compliance verification with MarketCounsel last year.

"Our last audit was in 2000, so we were nervous about our systems simply because they hadn't been tested in a long time.

MarketCounsel gave us three to four days to prepare our documents. We burnt everything we thought they'd want to see onto CDs. It took one morning to separate out everything just as we would have done if the SEC were coming into the office."

MarketCounsel, in its verification process, asked both for client information Halbert Hargrove had burned onto CDs, and information it hadn't. "We knew they'd ask for the complete files on certain clients, so we just extracted everything from Avante related to those clients. For each client file, we have folders in Avante that contain everything from scanned stuff to quarterly reports, our invoices, forms executed by clients, agreements, etc., so we just burned the client's entire folder." Metadata wasn't required to get this information, since the firm's client files are organized alphabetically and a last-name search sufficed.

What did MarketCounsel ask for during its verification that Halbert Hargrove had not already burned onto a CD? "Once in our offices," says Abusaid, "they drilled further for information. What we do is run the verification from our conference room where we have the Avante system up and running, and in real time could give them whatever they wanted to see. We wanted to make sure we could actually get to the data quickly, which we were able to. If MarketCounsel asked for data for clients in similar circumstances, we just pulled it up and they liked the fact there was no time lag."

Did MarketCounsel "write them up" for anything? "No, we're uber-conservative," says Abusaid. "Whereas the last audit we had from MarketCounsel was more superficial (more sampling and less detail), we felt we needed something more substantial this time around. We got the same prognosis as before, though: We're up to date."

An area where Halbert Hargove did need help, he admits, was in marketing materials. Says Abusaid, "Our letterhead and business cards are all available for review, but they hadn't been captured in Avante by the firm's compliance department."

Bernstein says a client like Halbert Hargrove needs a couple days onsite and about a half day for follow-up in which MarketCounsel's report is delivered in person or by phone. "For a client who's not on retainer, there's more time spent because we don't know them. We might spend one day before our onsite visit preparing, then two to three days for the onsite review and another full day offsite."

Are most advisors using document management systems, we asked Bernstein? "No, but it's a good thing, and it makes our lives and the advisor's life easier. If you look at sheer numbers, the majority of advisors is not using document management; they're using paper or they might be keeping documents on a Windows drive or in a CRM system. Additionally, some documents are kept with their custodian.

"And that's where they have trouble: knowing where everything is kept."

David J. Drucker, MBA, CFP, is the editor of Technology Tools for Today: The Newsletter, and co-chair of the annual Technology Tools for Today Conference for independent financial advisors.