The excess should be removed to avoid penalties. Unless the plan sponsor is paying the compliance penalty then the funds can remain in the SEP account, which generally is not the case.
What may have been intended by the financial rep's suggestion is that instead of returning the excess contribution back to you, the excess funds can be removed from the SEP and be deposited into a Traditional IRA. This may also count as a deductible contribution for you.
Click this IRS link for more information: https://www.irs.gov/retirement-plans/sep-fix-it-guide-contributions-to-the-sep-ira-exceeded-the-maxi...
The rep framed it as though it could remain in the SEP IRA and he would recode it as a traditional IRA contribution. I would then track the contribution in the future on the IRS non deductible IRA form. Is this not allowed then?
Perhaps the rep was suggesting treating this as a bookkeeping error and recording it so that it appears on Form(s) 5498 as partially a SEP contribution and partially a regular traditional IRA contribution. Otherwise, a SEP contribution is not permitted to be recharacterized as a traditional IRA contribution. The excess SEP contribution would have to be removed as an excess contribution and then a separate regular traditional IRA contribution made.
Note that the tracking of the year for which SEP contributions are made is the responsibility of the employer (yourself as self-employed), not the custodian. If some portion of the SEP contribution in question was made in 2018, that portion can be treated as a SEP contribution for 2018 instead of for 2017. (Of course you'll need sufficient self-employment income in 2018 to support that portion as SEP contribution for 2018.)