From the July 2014 issue of Investment Advisor • Subscribe!

Technology and Your Compliance Obligations

Technology can ease some of the burden of meeting compliance requirements

Most advisors do not enjoy the compliance regulations involved with running their firm. In fact, in a recent survey of advisors who have assets with my firm, 48% said that compliance rules and regulations were the most difficult things they have to deal with as an RIA. The next biggest complaint was technology, as 14% of advisors said technology issues were the most difficult things they had to deal with. How does your firm use technology to meet your compliance obligations? This is a complicated subject (and please don't consider me your compliance expert!); however, I do know that properly leveraging technology can make it a little easier to deal with compliance requirements.

Start by documenting everything you do from a compliance review perspective. For newer or less complex advisory firms, you could use Excel as a starting point for recording your compliance activities. For example, you want to make sure that you are documenting everything you do on a monthly, quarterly and annual basis. For larger or more complex firms, your contact management system and your imaging/workflow system would likely be a better solution. Whichever path you choose, it should be very easy to “look back” and confirm the compliance activities completed. And it is very important to stay up to date. An incomplete spreadsheet will clearly not help you during a surprise audit.

Another important area is the various reporting options and solutions that are available to your firm. Many custodians offer the ability to quickly retrieve information on money movement activity, address changes, trade history and execution reports. Furthermore, you also want to ensure you are properly storing and have immediate access to important documents such as account confirmations and statements. When an advisor is going through an audit, frequently the examiner requests the same reports directly from the custodian and compares the results with the data submitted by the advisor. It is critical that you understand how to properly run the reports so that you don't erroneously exclude any data.

In addition to the compliance reports available through your custodian, you also have a number of options available through the other systems used by your firm. For example, your CRM system should have a wealth of reports that document all your interactions with a client, recommendations implemented and other important activities. Your imaging system should also clearly demonstrate the “life cycle” of client- and firm-related documents so you can show the dates and changes that have occurred. Finally, your portfolio reporting system should offer the ability to easily run reports detailing the amount of fees a client has paid.

Perhaps technology is most important during an actual regulatory audit. As the examiner spends time in your office, it will be clear how your firm uses technology in response to their requests. When asked for documents related to a specific client, do you turn to a file cabinet in your storage room or are you using a document imaging system? The overall timeliness in responding to their requests is important as well. This can help demonstrate a high level of capability. An audit can be stressful and time-consuming, which is why it is critical that your technology is a strength for your firm.

Also consider your outsource options as it relates to compliance. There are a number of companies that offer technology such as cloud-based compliance solutions. Examples include NRS, National Compliance Services and MarketCounsel.

Ultimately, the technology systems and processes utilized by your firm should be an asset. As this profession becomes more complex, it is a safe bet that we will see an increasingly long list of compliance obligations. Effectively leveraging technology will continue to be a critical component in responding to this environment.

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