AI gives reason for advisors to keep client records longer than SEC requirements

Client data and communications records that advisors once deleted after five years under SEC rules could now have a longer shelf life thanks to the value in feeding the data to AI systems.

SEC Rule 204-2, known as the Books and Records Rule, requires registered investment advisers to maintain required records for at least five years, with the first two years in a readily accessible office location. But that rule has been in place for decades, long before the recent practice of client data and communications being fuel for AI to support advisor services.

“In the past, five years plus one day would be a great time to expunge your records of all data that is no longer required to be kept for regulatory purposes. Today, with AI capabilities being what they are and the need for great data, there might be tremendous value in retaining that data for much longer periods of time,” said Patrick Hunt, CEO of RIA compliance software SmartRIA.

Hunt spoke at RIA Edge Nashville earlier this month on a panel alongside The Oasis Group CEO John O’Connell, Steward Partners CIO Mohan Gurupackiam, and Subatomic CTO Karl Simon. Steward Partners, a hybrid RIA with roughly $50 billion in client assets, partnered in February with AI-powered client prospecting and outreach platform WealthFeed. 

“The insights that you can derive from [AI] and the predictions and the types of recommendations that systems could make based on much longer historical data — your models will be better,” Hunt told advisors at the conference. “Also, the cost of storage, particularly if you moved to a cold storage model, has gone down dramatically, and so retaining those records for longer periods of time is no longer a hassle or expense that it once was.”

Fintech startup Archive Intel provides data storage to RIAs, including the ability to analyze text messages and social media communications between advisors and their clients. The firm consolidates data from advisors and uses AI to check materials for SEC and FINRA compliance standards. 

“For the most part, I would say 90-plus percent of firms after five years are still deleting that data,” said Archive Intel CEO Larry Shumbres. “Now will that change with AI? Possibly. It all depends on the firm how they want to utilize the data, how they're going to use the data for AI agents, what kind of security they want to put around it.”

Shumbres explained that he’s been at conferences where SEC chairman Paul Atkins has told advisors, “we're using AI to audit you, the advisory firm. It's your fiduciary duty to be utilizing AI to make sure that you have all the information that we need when we come in for an audit,” said Shumbres. This sentiment was echoed by TaxStatus CEO Kevin Knull, whose fintech firm gives advisors direct IRS access to client tax data.

"AI will transform compliance on both sides of the equation. Firms can now enforce rules on outbound correspondence and block inappropriate recommendations before they're executed. Regulators, meanwhile, gain a far more efficient way to detect non-compliant behavior,” said Knull. “The message to firms is simple: if you don't use AI to find your issues, regulators will."