Mounting regulations means mounting payrolls at advisory companies

Investment management companies say that increasing regulatory burdens are inhibiting growth — but the heightened oversight also may be contributing to a boost in hiring, according to a survey released today. In a poll of 100 advisory firm executives, 61% of the respondents said that “regulatory and legislative pressures” pose the “most significant growth barriers” over the next year. The survey, which was conducted in May and June by the audit- and tax-consulting firm KPMG LLP, indicates that 29% of firms will target their biggest spending increase on regulatory compliance. Like companies in other sectors of the economy, investment management firms have a surfeit of cash, with 75% of the respondents calling it a “significant” amount. Unlike other sectors, however, they are beginning to spend it, with 24% saying that they are investing the money now, mostly in technology, strategic acquisitions and market expansion. Another area of spending is hiring, which again puts investment management firms out of step — or perhaps ahead — of other sectors. In the survey, 61% of executives said that they expect to expand their staff over the next year, with 32% saying that the boost will be an increase of 4% to 10%, or more. “Their balance sheets are strong, and they're beginning the hiring process,” said John Schneider, a KPMG partner and head of the firm's investment management regulatory practice. Increased regulation is spurring the employment uptick. Under the Dodd-Frank financial reform law, advisers to private-equity and hedge funds have to register with the Securities and Exchange Commission. Those firms are now working on their procedures and compliance programs, which must be in place by the end of March 2012. “As they go through the registration process, there is a recognition that there is a skill set that may be required to take on the responsibilities of the chief compliance officer,” Mr. Schneider said. That skill set may not reside in the company, forcing it to bring on new staff. A regulatory change that is causing a lot of headaches is the new Form ADV Part 2. Under SEC rules, the firm overview must be written in narrative form rather than provided through a series of checked boxes. In the survey, 30% of investment management executives said that compliance in this area will require a “significant” level of investment. The KPMG results mirror a compliance survey released earlier this month by the Investment Adviser Association. In a sampling of 412 advisers, the organization found that 92% employ at least one person full-time in a compliance or legal capacity, up from 78% in 2010. It also revealed that the top five areas where firms have boosted the scope and frequency of compliance testing are advertising and marketing, data security, custody, personal trading and regulatory reporting, which primarily involves the ADV Part 2 form. “In these areas they have to monitor, they are putting in an increasing amount of resources,” said IAA special counsel Paul Glenn. Asset managers are not just spending more to gird for more regulation, according to the KPGM survey. They're also preparing for a better business environment. “The other factor may be positioning for growth after the economy starts growing again,” Mr. Schneider said. But that day may be far down the road. The survey shows that 57% don't expect a complete recovery until the end of 2013 or later.