RIAs are embracing compliance as a necessary evil

In an era of increasingly complex regulatory oversight and possibly the most aggressive SEC ever, breakaway RIAs are realizing that compliance is not something to be ignored.

As the breakaway trend continues to gain steam, the growing ranks of independent financial advisors are embracing a raft of new challenges and opportunities that come with being entrepreneurs.

One area that can’t be avoided, and is often viewed as a necessary evil that doesn’t generate revenue, is compliance.

In an era of increasingly complex regulatory oversight and possibly the most aggressive Securities and Exchange Commission ever, registered investment advisors are realizing compliance is not something to be moved to the back burner and ignored.

“If you want to be in this business, you’ve got to have superb compliance, and unless you have a dedicated compliance officer, you’re missing things,” said Charles Sachs, chief compliance officer at Kaufman Rossin Wealth, an advisory firm owned by the accounting firm Kaufman Rossin.

The RIA reached the SEC’s threshold of $100 million under management a year ago and like a lot of advisory firms, it has been using outside support to keep up with the requirements associated with compliance.

Sachs estimates that his firm spends about $40,000 a year on outsourced compliance support, which he believes is the right way to go.

“It’s a big investment that you need to make because there’s nothing that can damage your business more than not being up to speed on compliance,” he said.

Dave Settanni, chief financial officer at Settanni Financial, represents a four-person shop with $200 million in client assets that was launched in 2018. He estimates spending $50,000 a year on technology and outside help to keep his firm within the lines of regulatory compliance.

“I feel like the consulting firm has a program and that’s sufficient for most small and midsized RIAs,” said Settanni, who was his firm’s chief compliance officer until April, when that title passed to a colleague.

Even with outside help, Settanni estimates he spends about 20 hours per month on compliance-related issues.

“I feel like it’s the prudent decision to have those policies and people in place, because it’s definitely something we need and it’s the right thing to do,” he said. “I’m not getting business because of compliance, but I’m also not losing business because of compliance.”

In sports parlance, this would be an example of a good defense making a good offense.

“One of the most important things we do for compliance is to make sure we’re hiring the right people,” said Chuck Failla, founder of Sovereign Financial Group.

“Compliance is non-revenue generating from a client perspective, but it could be a good recruiting tool,” he added. “We pride ourselves on our compliance being one of our selling points.”

Failla went independent and launched Sovereign four years ago. The RIA, which has grown to $640 million in client assets, has always had a dedicated internal chief compliance officer but also relies on outside help on compliance, and is now in the process of hiring a second person to focus on compliance.

“You can’t do it without some kind of guidance, it’s just a matter of how much guidance you want,” Failla said.

The good news for RIAs sweating over compliance is that an entire cottage industry has developed to provide all manner of support, from a full-time outsourced CCO to retainer relationships to hourly consulting.

“Unless you have a dedicated compliance officer, you’re missing things.”

Charles Sachs, chief compliance officer, Kaufman Rossin Wealth

“You have a lot of people that have been in the wirehouses where they had it all done for them,” she said. “They’re coming out with a big enough book of business that they can afford to pay for outsourced compliance.”

THIRD-PARTY PERSPECTIVE

Key Bridge Compliance, launched in 2019, is just one example of firms that offer fully outsourced CCOs and project-based work, and can supplement the work of an internal CCO.

As a former Florida state securities regulator, Dowell brings a unique perspective to the role of helping RIAs stay in compliance.

“The biggest missteps typically have to do with regulatory filings because there’s so much nuance and random data and times and formatting,” she said. “Those can be very tricky and time-consuming if you’re not doing them on a regular basis. And sometimes the advisors don’t know how to answer the questions because they don’t know what is being asked.”

In addition to knowing how to navigate the red tape, Dowell said the experience of a third-party perspective can help advisors avoid trouble they might not have anticipated.

“There are some areas where boundaries can be pushed and some areas where they will nail your feet to the cross,” she said. “Most of the time that comes down to customer harm and areas like not disclosing fees or conflicts of interest. You want to be as far away from that as possible.”

Depending on the size of the RIA and the type of compliance help they are seeking, Dowell said Key Bridge fees can range from $5,000 to $8,000 per month.

“The people that come to us are very good salesmen and they are good with the money, but not so good at paperwork, and they don’t want to deal with the headaches, and they don’t know about compliance,” she said. “We try to be very proactive. Because we have our fingers in so many firms, we see the pressure points and know the questions the regulators are asking.”

Compliance can be expensive and those costs are only expected to rise, but that is an unavoidable reality of going independent, according to Liz Watkins, chief operating officer and chief compliance officer at Crescent Grove Advisors, a $4 billion RIA launched eight years ago.

Even though Watkins has 20 years of experience in compliance, she consults with an outside firm to make sure she is covering all the bases.

“I like using someone [outside] who is very experienced versus hiring someone new,” she said. “The challenge is without someone embedded next to the business, the details can be lost. There’s so much coming at us, if you don’t have someone focused on it, you’re going to miss something. It’s like we’re drinking from a fire hose, and firms have to be ready for any kind of environment.”

The firm Watkins uses for a second set of eyes on compliance is Relativity Investment Management Consulting, where principal Jeff Squires offers a host of services but doesn’t work as an outsourced CCO.

“CCOs might use me as an alternative to hiring a compliance analyst or another full-time employee,” Squires said. “Others will use me to train their people. There’s a huge demand for experienced compliance folks.”

Squires has been doing compliance consulting for 20 years and has seen an uptick in demand.

“There was a time where advisors felt as long as they were doing the right thing by the client, they should be OK, and that worked for advisors for a number of years,” he said. “Compliance is now a significant business risk for every registered investment advisor. It’s a true cost of doing business.”

UNDER SCRUTINY

As investors have become savvier and access to information grows, advisors are realizing it’s not just the regulators paying attention.

“When it comes to compliance, there are a couple of constituents that are important to advisors,” Squires said. “The SEC and other regulators have a huge interest in your compliance. But more and more clients are looking at your compliance, especially institutional investors.

“One of the biggest risks to advisors is having to disclose to clients that they’ve had a regulatory issue,” he added. “Most advisors want a clean record, but if they have an issue, they have to disclose it to their clients.”

Kirk Kreikemeier, owner of Illinois-registered Pebble Valley Wealth Management, has $90 million under management but isn’t taking any chances as he nears the $100 million mark and SEC registration.

Over the past several years, Kreikemeier has gone from doing it all himself to paying for templates for regulatory filings to now paying NRS ComplianceGuardian about $4,000 a year for outside compliance help.

“I need the experts to tell me what I have to focus on and when stuff comes up, I don’t want to have to research a definition,” he said. “When I reach $100 million, I’ll engage with them to see if I should outsource the CCO.”

Gary Schwartz, president of Madison Advisory Services, is listed as the $500 million RIA’s chief compliance officer but also uses an outside attorney and RIA in a Box for help with compliance.

“We use an outside firm for all the little pieces,” he said. “I don’t think we’re big enough to do everything ourselves and there’s a lot of constant changes in the way the regulators look at things.”

In his 18 years as an RIA, Schwartz said his firm has always used an outside consultant for compliance assistance.

“I think you need somebody,” he said. “They do a lot of mechanical and software things. They deal with so many different firms, they see what’s really going on and they bring things to our attention like something you wouldn’t see even if you read every bulletin that came out.”

The challenges and potential pitfalls around compliance have become part of the selling point for recruiting at Wealthcare Capital Management, a $5.2 billion RIA that has 170 advisors operating under its Form ADV and compliance umbrella.

“They are all Wealthcare advisors in the eyes of the SEC and a key part of our deliverable is compliance,” said Wealthcare president Matt Regan.

In addition to a three-person in-house compliance team, Regan said Wealthcare uses “outside counsel specific to the RIA industry.”

“If you have your own ADV you can’t get completely away from that compliance responsibility,” he added. “In a model like ours, the only person that answers to the SEC is our compliance officer. We file updates, we hold registrations, we make sure anything regulators need is taken care of on our end.”

That kind of compliance blanket is part of the reason some advisors avoid going 100% independent.

“I use the Royal Alliance corporate RIA, in large part, because of compliance,” said Rita Robbins, president of Affiliated Advisors.

“There’s a great deal of compliance work required of RIAs,” she added.

Jason Van Duyn, president of AQuest Wealth Strategies, is on the corporate RIA of LPL and said he feels “coddled like a baby bird in the nest” when it comes to compliance.

“Other than doing the right thing, I don’t really have a lot of compliance responsibilities,” he said.

Meanwhile, the fully independent route will always include a certain degree of stress and responsibility when it comes to compliance, and a big part of that is tied to the actual title of chief compliance officer.

“Whoever holds the CCO has some risk,” said Squires of Relativity Investment Management Consulting.

“If you’re an advisor who doesn’t want the compliance risk, you transfer it to an outsourced CCO, and then they have more say over the business risks your firm will take,” he added. “However, the responsibility ultimately rests with the RIA and the ownership structure.”

For that reason, Squires said, RIA owners need to be careful about which employee holds the CCO title and why.

“The SEC has proven they are willing to assign liability to the CCO along with the owners,” he said. “Every person named a CCO needs to be aware that at some level they have liability and that’s why just assigning an assistant to be CCO doesn’t do that person any favors.”

Jeff Benjamin and Chuck Failla are co-chairs of GoRIA, a new resource from InvestmentNews for unbiased research and reporting on the tools, platforms and technologies required to help breakaway advisors.