Brokers warned to beef up training on complex products

Regulators alarmed at lack of knowledge brokers demonstrate about the products they're selling

Oct 30, 2014 @ 1:24 pm

By Mark Schoeff Jr.

It's not just clients who ask brokers to explain the increasingly complicated financial products they're selling. Sometimes regulators inquire — and listen carefully for fumbling and stumbling answers.

If a broker doesn't grasp the product, the Financial Industry Regulatory Authority Inc. takes note.

“When we're doing an investigation, one of the key things that we notice is when ... we ask the broker to explain the product, and they can't do so,” Susan Axelrod, Finra executive vice president for regulatory operations, said Wednesday at an industry conference. “That's a clear indication to us that the broker didn't understand the product, and we worry quite a bit about the conversations they've been having with customers in the sales process.”

Finra is concerned about whether investors understand the proliferation of financial products they're being offered in an effort to boost returns in the current low-interest-rate environment, Ms. Axelrod told the audience at a Securities Industry and Financial Markets Association conference. They include a range of complex fixed-income instruments, alternative mutual funds, unconstrained bond funds, exchange-traded funds and floating-rate bank loans.

When Finra reviews brokerage sales of complex products, it looks at training, discussions with customers, assessment of suitability and the monitoring of portfolio concentrations, Ms. Axelrod said.

State regulators also are noticing a lack of broker knowledge about complex products, especially variable annuities, that they put in client portfolios.

“We're surprised at how many [registered] reps cannot explain the products they sell,” Tanya Solov, Illinois securities director, said at the SIFMA conference.

The situation is drawing attention to the level of sales training, Ms. Axelrod said.

“Training is a really important thing we look for, and we'd love to see more robust training as it relates to complex products being sold to retail customers,” Ms. Axelrod said.

Wirehouse officials said they've stepped up complex-products education for their representatives. Morgan Stanley has made training on liquid alternatives mandatory for their advisers, according to Frank McDonnell, an executive director at the firm and head of mutual funds and 529 programs.

“There's definitely adviser demand for that training, although [the fact] that it's mandatory helps,” Mr. McDonnell said at the SIFMA conference.

Raymond James Financial Inc. has made training on complex products a continuing education requirement.

“The liquid alternatives component has become more prominent,” said Tarek Helal, Raymond James vice president for product development and research.

In a speech at the SIFMA event on Tuesday, Norm Champ, director of the Division of Investment Management at the Securities and Exchange Commission, called on alternative mutual funds to improve the disclosure of their investment strategies.

Sophisticated financial instruments are becoming more popular. For instance, alternative mutual funds held $282 billion in assets at the end of September, and represented one-third of fund inflows last year.

Finra doesn't want to shut off the spigot.

“Our goal is not to prevent the sale of products but to make sure investors know what they are acquiring,” Ms. Axelrod said.


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