Financial Advisors Hammered By Compliance Costs

By Brian O'Connell InsuranceNewsNet

Financial services firms are getting fed up with high compliance costs, as 90 percent said they expect such costs to rise, according to a recent report from Accenture .

Nearly 50 percent of the executives expect increases of 10 to 20 percent, with 20 percent expecting increases of more than 20 percent. Additionally, 25 percent of surveyed firms reported spending more than 5 percent of net income on compliance.


“As the cost of maintaining compliance rises, financial firms must find a path to more sustainable compliance costs,” said Jim D’Arezzo, CEO of Condusiv Technologies, a storage software firm based near Los Angeles, which works with financial services firms to maximize data usage. “Right now, financial services firms are grappling with three major compliance risks, fraud and financial crime risk, business risk and cyber risk.”

Regulators Cracking Down

Increasingly, a tougher regulatory environment has put many advisory firms in a bind.

“Over the past 10 to 15 years, advisory firms have seen more regulations on the books, and the regulatory bodies have appreciably increased the enforcement of the regulations that are on the books,” said Jeff Groves, president at southern California-based ComplianceWorks.

FINRA has especially ramped up enforcement actions and regulatory oversight of broker dealers, Groves said. “In 2007, there were over 5,400 registered broker-dealers with FINRA, and today that figure is down to 3,200,” he stated. “Yet despite the 40 percent reduction in firms, FINRA revenues are up.” 

Gone are the days of having a compliance program in effect but lacking documentation of its supervision, and having regulatory audits come out with a few minor deficiencies, Groves said. “In the past, a firm could describe its compliance system in an audit, now the rule of thumb is if a firm did not document the task, it wasn't done.”

The company compliance manual is a good example, Groves said. “A firm used to buy one and put it on the shelf, dust it off when the regulators came in and hand it over,” he noted. “Now, not only does it need to have updated annually for new regulation, it has to have firm specific written procedures on how the firm will implement the regulations and how the activity is documented.”

Hiring professional compliance help has grown more expensive, as well. 

“The compliance profession does not come cheap, due to the training and experience required to keep a firm safe,” Groves said. “15 years ago, chief compliance officer salaries easily could have been $75,000 to $100,000 for small to medium firms. Today, getting below $150,000 means you’re getting an inexperienced person trying to move up.”

Outsourcing your compliance management is a good idea, as it’s generally more affordable than hiring a CCO, and regulators are supportive of a financial services firm farming out their compliance needs.

“Outsourcing can be just in support of a CCO or to supplement an existing compliance program,” says Groves. “Generally, regulators like the outsourced CCO model as it leads to better compliance programs versus compliance novices doing the best they can.”

However, the SEC has started cracking down on outsourced CCOs whose best skill is cashing the check.

“Those financial firms that don’t take the time and effort to understand the business they are supposed to supervising, and who don’t devote the time with the firm to be effective are getting firms in hot water,” he added. “Most compliance outsourcing firms with qualified programs and staffs would support some form of licensing or credential for compliance professionals to weed out the bad consultants.”

Going Independent

As regulatory activity increases, more and more advisors are going the independent route, partly to reduce the cost obligations of compliance as a broker-dealer firm.

“I’ve been an advisor for 21 years in a variety of different structures or models,” said Matthew Stewart, owner of Forestview Financial Partners, in Delaware, Ohio. “I also spent eight years under a captive broker-dealer, then four years under an independent broker-dealer, then seven years working for a private bank & trust company, and now a little over a year as an independent registered investment advisor.”

Talking to his peers helped Stewart survey the lay of the land as it relates to the burdens of compliance in the various models.

“That was a main factor in my decision to start an independent RIA firm versus affiliating with another independent broker-dealer,” he said. “In addition to giving up a percentage of my revenue due to the broker-dealers grid model, the costs to maintain licensure with FINRA in multiple states, as well as the onerous compliance requirements they require of the broker-dealer, made me realize that being my own RIA was more reasonable — from a compliance and cost standpoint.”

As an RIA with under $100 million in assets, Stewart’s firm is registered and regulated by Ohio’s Division of Securities, rather than the U.S. Securities and Exchange Commission.

“Ohio basically follows the SEC rules,” he said. “My cost in terms of time and money is a lot less than if I had affiliated with a broker-dealer.”

As Stewart’s experience attests, financial advisors are doing what they can to stay in compliance in a tough regulatory environment.

What’s making things tougher for advisors is the increasingly high costs of regulatory compliance – an issue that, unfortunately for the advisor community, isn’t going away.

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