A Strong Compliance Program Aligned with Your Financial Firm

There are three distinct advantages to outsourcing compliance.

The first relates to the knowledge gap. Many firms have CCOs that are also principals of the firm or administrative personnel. This typically means they have a limited compliance background. While compliance is not rocket science, 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 be 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. Perhaps you use something from a previous firm without knowing how effective that was in meeting the requirements for any given task. A solid provider of outsourced compliance will proactively define the compliance program for your business model, translate it into a calendar, and perform all assigned tasks. They could help the firm by training or provisioning information on how in-house personnel should address certain situations.

Second 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 is looking for, you may end up spending valuable time on a compliance task that needs to be re-done requiring significant changes/additions to satisfy your examiner. It’s essential for a firm to give the regulators the documents requested in a format that they are accustomed to seeing. This will give them comfort that the compliance program is functioning effectively.

Last is the opportunity cost for principals or in-house staff working as makeshift CCO’s. Compliance tasks are an obligation for all financial services firms but they aren’t revenue-producing in-of themselves. A poor or neglected compliance program can generate a great deal of business risk which can lead to lost revenue. So, when a principal or in-house staff member devotes time for compliance tasks instead of business developing tasks, they lose time spent generating new clients that would have more than pay for the cost of hiring an outsourced compliance provider.

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. The most important thing to them is that the firm’s compliance program functions properly. However, when firms that have a solid outsourced provider, in a limited role, neglect the rest of the program they typically don’t have good audit experiences. To a regulator, the firm appears disinterested in compliance, using the outsourced contract as a smokescreen to show that compliance is important. Instead, this shows that the firm is disengaged from its own compliance program.

In other cases, firms might save a few dollars by hiring an outsourced CCO that does minimal 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. How can you effectively supervise anything without direct contact and a complete understanding of the business? This would be the first question from a regulator. That’s why finding an engaged, knowledgeable, experienced outsourced CCO is a great asset that can save the firm substantial money.

It’s essential to find a proactive outsourced CCO rather than someone whose best skill is cashing the check.

To make informed, effective decisions on compliance providers, the decision-maker should have an understanding of financial service compliance. Unfortunately, an overwhelming majority hire what they think is the best or lowest price which then leads to bad audit results, client legal actions, and/or 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 runs for years. The cost paid could have been neutralized with a 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 claims 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. This would be the equivalent of some financial planning software claiming 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/calendar generation. They, however, are never on-site with a firm. When you call in, they may charge you for phone time and stick you with someone new every time. The people on the phone may not even be steeped in compliance experience or perhaps lack the experience with a compliance program at a high level.
         3. Admin Step Up Solution – this is where a person at the administrative level in a firm wants to increase their value by saying they do compliance. This might be one of the worst arrangements we see. Generally, the person is actually lacking in proper compliance experience, leaving them (and the firm) with a limited and narrow scope. Once they get the pat on the back for stepping up, they typically find compliance work tedious and often let things slip. Very rarely do we see them set up a complete program that addresses all the business units and risks a firm faces with any kind of efficiency. Ask yourself… if my admin is so accomplished in compliance then why did they accept a position and compensation as an admin? On the other hand, admin that supports either an in-house compliance officer or an outsourced compliance officer 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 is dependent on the skillset and time of human resources available. Are you really going to 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; admin level staff to take on the blocking and tackling of filing, chasing down data or firm reports; and 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 utilizes CCO level personnel to provide a more holistic and proactive service to guide a firm’s compliance program. ComplianceWorks personnel use the firm’s proprietary software, CAP, to set a customized compliance calendar. This helps the compliance consultant to perform their compliance reporting functions while performing the tasks outsourced both remotely and with on-site visits.

ComplianceWorks builds relationships with its clients to facilitate the proactive direction of a client’s compliance program. We provide transparent accountability and flexibility to change service levels at any time without locking a client 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 eliminating the cost of employment taxes and benefits with no obligation to invite the person to the Xmas party!

At ComplianceWorks, outsourced CCOs are much more costly than outsourced compliance consultants for two reasons. As a CCO, ComplianceWorks takes on the personal liability of the CCO position. For this reason, we need to make ourselves available as a supervisor of the business. We must understand the ongoing operations of the business which would increase our time-on-site to 2-4 days per month. As a result, the range of outsourced CCO work is $6,000 – $10,000 per month based on the size and complexity of the client. For this to make business sense, the firm should be reasonably sized. An alternative solution is to get the maximum outsourced consultant role. ComplianceWorks would perform all the compliance program work, direct the compliance program like a CCO, and then work with the person named CCO to help with signing off documents and general supervisory duties.