Securities and Exchange Commission regulations, along with legislation like Sarbanes-Oxley, the USA Patriot Act, and anti-money laundering rules, are putting a significant strain on asset management firms’ compliance budgets, according to a recent study by Boston-based Cerulli Associates.
Asset management firms estimate their compliance costs will climb 10% to 20% over the next 12 months, Cerulli found. Karen Keene, a senior analyst at Cerulli who wrote the report, says a hefty portion of the compliance costs are going to pay for new staff, with 88% of survey respondents saying they have hired between four and six new compliance employees over the past year. “Firms are also trying to determine how to enhance technology–if they have any–to manage all of the compliance and reporting demands” they now face, Keene says. “Profits are being squeezed–assets under management are down and costs are up” and the increased compliance burden is “putting additional pressure on asset management firms of all sizes.”
She adds that “for the past couple years, it’s been more difficult [for asset management firms] to increase assets under management and get their funds noticed in a large and competitive marketplace.” Distribution costs are also rising, she says. Small- to mid-sized firms are feeling the biggest pinch, since they often employ only one person to handle compliance.
None of the firms participating in the Cerulli survey said that they would merge with another firm in order to cope with their compliance load. Instead, Keene says, the majority of firms are choosing to outsource many compliance functions.