Andrew Murdoch severed ties with independent brokerage Raymond James in 2012. He did this, in part, because he wanted to change his sales emphasis from commissions and fees to references and referrals, which required that he set goals for larger volumes of business and repeat business.
“Higher volume offsets thinner profit margins,” Murdoch says.
As a certified financial planner at Somerset Wealth Strategies in Portland, Ore., Murdoch now focuses on selling the best products. “Otherwise in this industry, there is a culture that tends to be too focused on sales,” he says.
Culture at broker-dealers nationwide is currently under review by the Financial Industry Regulatory Authority (Finra), which announced targeted examinations of 14 major firms to evaluate how the industry establishes, communicates and implements cultural values.
“Sales is certainly an issue Finra will evaluate as well as compensation, conflicts of interest, compliance with rules and regulations and how well firms are auditing and surveilling their brokers,” says Brian Rubin, a partner attorney at Sutherland Asbill & Brennan who represents clients being examined by the SEC and Finra from the firm’s D.C. office.
In January, Finra posted its annual regulatory and examination priorities letter to highlight issues of importance to its regulatory programs. The culture at securities firms was noted as being a top priority.
“A firm’s culture contributes to, and is also a product of, a firm’s supervision and its approaches to identifying and managing conflicts of interest and the ethical treatment of customers,” wrote Richard Ketchum, chairman and CEO of Finra. “We will formalize our assessment of firm culture to better understand how culture affects a firm’s compliance and risk management practices.”
Critics, like Columbia Business School professor Shivaram Rajgopal, are skeptical about how the agency will evaluate culture.
“It’s very difficult to measure culture because it’s hard to get an honest answer from the staff at brokerage firms at any level," says Rajgopal, who teaches accounting and auditing. “The results of this investigation will depend on the quality of the evaluating instrument, which is a survey, and certainly whoever is answering the questionnaire will face pressure from management to put the best possible spin on the numbers.”
For example, when Murdoch worked at Raymond James and Morgan Stanley, he noticed a higher title was proportionate to the amount a broker sells.