A Strong Compliance Program Aligned to Your Financial Firm

There are three distinct advantages to outsourcing compliance.

First relates to the knowledge gap. Many firms have CCOs that are also principals of the firm or more administrative personnel which in either case do not have or have a limited compliance background. While compliance is not rocket science, like anything else it does require some familiarity and process to be effectively administered. Without a compliance background how is one supposed to know what areas need to documented and how often? How in depth does any given compliance task need to be? By what date or what frequency do compliance tasks need to be completed? Without a compliance background you are left guessing as to what’s best or you use something from a previous firm without knowing how effective that was in meeting the requirements for any given task. A good provider of outsourced compliance will proactively define the compliance program for your business model and translate it into a calendar and the perform the assigned tasks and help a firm either by training or the provision of information on how in-house personnel should address assigned to them.

Next is another extension of the knowledge gap – if you get a compliance calendar you can figure out what tasks need to be done and in some cases how often, but what should the final document contain and in what format. In other words you again are spending time doing a compliance task with your best efforts, but with an uncertain outcome. Without knowing what a regulator wants to see and the format you may end up spending valuable time on a compliance task that needs either to be re-done or have significant changes/additions to satisfy your examiner. A main focus of a regulatory audit from the point of view of the firm is to give the regulators all the documents requested in a format that they are accustomed to seeing. This will give them comfort the compliance program is functioning effectively, maybe generates a few minor deficiencies and then both the firm and the regulators move on.

Lastly is the opportunity cost for especially principals/CCOs, but also all in-house staff to spend time on revenue producing tasks. Compliance tasks are required and an obligation of any firm in financial services but are not revenue producing in-of themselves. A poor or neglected compliance program can cost revenues and generate a great deal of business risk which can lead to lost revenues but that is different that producing revenues. So, if a principal of a firm devotes time spent on compliance to business development instead, the principal will generate new clients that will more than pay for the cost of hiring an outsourced compliance provider. For a good estimator on what that looks like in your firm go to THIS PAGE for our calculator on clients gained by outsourcing.

Historically regulators took either a dim view or no view at all on compliance outsourcing.  However, the more current view is generally favorable as they have come to see that the resulting compliance is generally better quality, more on point and provides better security and information for clients of financial services firms.  That said the shape the compliance program is in speaks the loudest.  Firms that have a great outsourced provider in a limited role and then neglect the rest of the program will not have a good audit experience.  In essence the firm appears disinterested in compliance and is using the outsourced contract as a smoke screen to say compliance is important or that the firm is disengaged from their own compliance program.  On the other hand firms might save a few dollars by hiring an outsourced CCO that minimally does some of the work and rarely or never shows up on-site.  If that provider is the CCO then he/she is a supervisor of the firm just as an in-house CCO would be and how can you effectively supervise anything without direct contact and complete understanding of the business – which will be the first question of a regulator.  So engaged, knowledgeable and experienced outsourced CCOs are a great asset and can save the firm substantial money vs hiring a full-time CCO and realize positive regulatory audit results.  The outsourced CCO whose best skill is cashing the check leaves a firm in a very precarious situation.

A person really has to have a compliance background to make effective decisions on compliance providers.  Unfortunately, an overwhelming majority hire what they think is best or something that is lowest price which leads to a lot of bad audit results, client legal actions and general dissatisfaction on services provided (another aspect of the knowledge gap).  An old rule of thumb is that a firm should devote 10% of its budget to compliance solutions including staffing, software and consulting.  Many firms try to get by with less but do so at great risk.  In many cases the cost of one negative event will be worth years of what they “saved” versus sufficient allocation of resources to compliance.  Fortunately a good dose of common sense will go a long way in looking at various solutions:

1. 3. 1. 1. Technology solutions – these can be great tools but are not a replacement for human resource allocation to compliance.  A technology solution that purports to be all you need is a) Shifting all the work to the firm and charging you for it and b) Harming a firm through a false sense of security.  Think if a financial planning software claimed that all you need is the software to do financial planning?  Compliance technology is a good tool, not a magic bullet to get everything done.
         2. Remote Consulting solutions – an interesting approach to scale compliance consulting.  This solution has people manning the phones to answer questions and perhaps provide some assistance on compliance tasks or calendar generation.  They are never on-site with a firm and when you call in you may be charged for phone time and usually you will get someone new every time you call.  Those on the phone are often not steeped in compliance experience and almost none of the call takers ever worked in a compliance program at a high level.
         3. Admin Step Up Solution – this is where a person who is more at the administrative level in a firm wants to increase their value by saying they do compliance.  This may be one of the worst arrangements we see.  Generally the persons compliance experience is limited and narrow in scope.  Once they get the pat on the back for stepping up they find compliance work tedious and often let things slip.  Very rarely do we see them set up a complete program addressing all the business units and risks a firm faces with any kind of efficiency.  Ask yourself, if my admin is so accomplished in compliance why did they accept a position and compensation as a basic admin?  On the other hand an admin that is great a supporting either an in-house compliance person or an outsourced compliance person is worth their weight in gold. 
         4. Outsourced Compliance Providers – are generally more experienced and accomplished in the compliance field.  Their service tends to be more comprehensive and you will likely get assigned to a person who is devoted to your firm.  Their cost is usually higher than other solutions but the higher level of service makes the added cost understandable. 

So the answer to the question of what is best is dependent on the skill set and time of human resources available.  Will you really use the tech product or will it stack up in the inbox?  For most firms a combination of useful technology tools to help organize compliance programs, having that admin level person to take on the blocking and tackling of doing the  filing and chasing down data or firm reports and then having a CCO or outsourced person (or both) to manage and run the compliance program at a high level seems to be the most successful formula.

ComplianceWorks is an outsourced compliance provider that utilized CCO level personnel to provide a more holistic and proactive service to guide a firm’s compliance program and to do the old fashioned thing of rolling up the sleeves and doing the work.  ComplianceWorks personnel use the firm’s proprietary software, CAP to set a customized compliance calendar and that helps staff of its clients perform their compliance reporting functions and then mixes in performing the tasks outsourced both remotely and with on-site visits.  ComplianceWorks builds relationships with its clients to facilitate proactive direction of a client’s compliance program, provides transparent accountability and provides the flexibility to change service levels at any time without locking its clients into long term contracts.  If ComplianceWorks’ service level is not good enough to retain a client, then quite frankly we do not deserve their business.

In short, with ComplianceWorks you are getting a CCO caliber person for the same or lower cost than hiring a basic, non-compliance trained administrative position.  Engagements for State Registered Advisers run $550 – $1500 per month and for SEC Registered Advisers the cost is $1,250 – $5,500.  Broker Dealer monthly expenses run $1500 – $8000 a month.  By outsourcing versus hiring, your cost is either equal or less than the salary of an administrative person; completely eliminates the cost of employment taxes and benefits and you have no obligation to invite the person to the Xmas party!

In short, with ComplianceWorks you are getting a CCO caliber person for the same or lower cost than hiring a basic, non-compliance trained administrative position.  Engagements for State Registered Advisers run $550 – $1500 per month and for SEC Registered Advisers the cost is $1,250 – $5,500.  Broker Dealer monthly expenses run $1500 – $8000 a month.  By outsourcing versus hiring, your cost is either equal or less than the salary of an administrative person; completely eliminates the cost of employment taxes and benefits and you have no obligation to invite the person to the Xmas party!