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No advisor has ever gotten into the profession because they were passionate about compliance. Compliance is so time consuming and costly that many advisors would rather avoid it.
But it's a non-negotiable burden.
Most large firms have departments that deal with compliance. But what happens when an advisor wants to break away from her large firm and start her own RIA? Compliance takes time, effort, and funds that many advisors don't have, which can lead them to stay with a firm even if they disapprove of the client experience or have limited opportunities for professional growth. Essentially, leaving a large firm is too daunting.
However, compliance shouldn't be the reason you stay at a firm that doesn't align with your values or your vision. Luckily, there are alternatives.
Option 1 – Keeping it in-house
The first option is to keep compliance in-house. But as an RIA, implementing an in-house compliance program requires taking on a great deal of responsibility, including delegating control to a chief compliance officer (COO), ensuring the adequacy of annual audits and regulatory technology, and confirming that all procedures and policies cover the full scope of any and all relevant legislation. Changes to compliance regulations happen regularly, so your firm will absorb this position over the long haul. Additionally, hiring a full time CCO is costly, and there are more economical options.
Option 2 – Hiring a compliance consultant
A better choice for a smaller, state-registered firm is to hire a compliance consultant. Outsourced CCOs offer a focused resume of industry and regulatory experience and can provide an outside perspective to workflows and compliance programs. An outsourced consultant also maintains focus in its core area, compliance, without being pulled into other business objectives of your firm.
There are two main fees paid to an RIA compliance consulting firm:
The first is a one-time startup cost for the logistics of getting everything properly set up. This includes application process, filing, and paperwork fees, and the price range is usually $10,000-$25,000.
The second cost is an annual retainer fee that covers the expense of ongoing compliance guidance, updates on new rules and regulations, and annual administrative work like license renewal fees and ADV updates. The price range is generally $8,000-$15,000 per year.
Although it solves the issue of time, this option costs what could be a large portion of your annual budget for outside support and leaves growth-related expenses without funding.
The SEC amended the Form ADV in 2016 to include a disclosure of your firm's outsourced CCO resources. This put an outside compliance service front and center in the eyes of the SEC. And, although outsourced CCOs can take on the heavy lifting of compliance regulations, it continues to be the RIA's responsibility to foster its culture of compliance.
Option 3 – Joining a financial network
The best option for independent RIAs is to become a member firm in a financial network that assists with compliance coverage. These networks, designed for independent firms, deal with the logistical details allowing you, as a firm owner, to focus on providing clients with better financial solutions.
In addition to handling compliance, financial networks offer resources to member firms, including portfolio management, marketing support, and errors and omissions insurance. When choosing a financial network, conduct extensive due diligence on the service providers they use and review factors such as cost, experience in the industry, and longevity.
Ultimately, no matter what your situation, compliance is a mandatory aspect of the financial advisory business. But that doesn't mean you should be at its mercy.
Bridget Grimes and Katie Burke co-founded Equita Financial Network out of a need to fuel business success while empowering other women in the financial services industry. Equita became the first platform solely focused on women-led financial planning firms, designed to encourage women to make the leap into launching their own practice and provide solutions to support them every step of the way. Equita is a way for like-minded women to not only share resources and run their business at an affordable cost, but to also share ideas on everything from best practices to help with questions regarding client issues.
Equita Financial Network takes compliance off your plate. It provides all ongoing compliance oversight for member firms, including, registration, compliance documents, ongoing compliance for content, and marketing. If you're interested in joining a network of like-minded female-run firms with common values, contact Equita today.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
