More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
This is the second post in a two-part series on outsourcing among RIAs. In Part One, we discussed the overall outsourcing environment and technology outsourcing trends. In this post, we take a look at compliance outsourcing trends and important considerations for advisors looking to outsource their compliance duties.
When it comes to compliance, independent advisors today face more uncertainty and challenges than ever. As you’re well aware, many of the regulatory changes ushered in by the Dodd-Frank Wall Street Reform and Consumer Protection Act to date have required firms to spend significant time and resources to remain compliant. Meanwhile, many portions of the act are still being discussed in an effort to clarify their intent, implementation and impact.
It’s hardly surprising, then, that advisors are increasingly turning to outside experts for help. Schwab’s 2011 RIA Benchmarking Study reveals that more than one-third (38%) of RIA firms now outsource at least some of their compliance tasks, up from 27% in 2010, and that outsourcing compliance is of high importance to the majority of those firms (79%).
Benefits of Outsourcing Compliance
Compliance outsourcing is most common among small and mid-sized firms, with more than half of RIAs with $50 million to $100 million in assets under management (AUM) using at least one outsourced solution, according to the benchmarking study.
This makes sense as smaller firms often don’t possess the in-house resources needed to handle the full range of compliance tasks in addition to their other responsibilities. Also, many new RIAs (including former wirehouse brokers, whose firms had handled compliance) are looking to outsourcers to set up compliance functions properly right out of the gate. By contrast, larger firms may be better able to address compliance entirely by themselves and do so efficiently.
Advisors who outsource compliance point out several benefits. Many like knowing that their consultants or other compliance experts are keeping tabs on all the changing regulatory developments and will provide guidance on key next steps as new rules emerge.
They also report that delegating compliance to an outside firm frees up time that they can reallocate to other tasks that drive their firms’ growth and profitability. As I noted in Part One, this is part of a growing trend among advisors, who are redefining which of their various duties are central to their unique value propositions and which are secondary and can be outsourced.
The Form ADV Part 2 revision is one good example of this. Many firms’ principals hired compliance consultants to deal with this new rule instead of spending days figuring it out themselves. This enabled them to comply with the new regulatory requirements while also staying focused on business development and client service. Going forward, we may see advisors take similar actions around new rules, such as the filing of Form PF for SEC-registered advisors with $150 million in private assets under management.
Finally, advisors who outsource compliance have reported that they’ve realized significant cost savings of 26% on average versus handling compliance in house. Given these findings, it’s easy to understand why 73% of advisors, according to the benchmarking study, who outsource compliance tell us that they are happy with their decision.
Whether it makes sense to outsource compliance at your firm will depend on the expertise of your staff in this area and the amount of time and effort you spend on
That said the SEC likes to see evidence that firms have a “culture of compliance” and are monitoring day-to-day operations such as trading and following the proper procedures, so it may not be wise to completely outsource all aspects of your compliance program.
Most important, do plenty of due diligence when considering a compliance provider. Regardless of what or how many functions you choose to outsource, it’s you–not the provider–who is ultimately responsible for compliance-related results at your firm.
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