By: SCOTT GILL | DIRECTOR OF KEEPING US COMPLIANT
Many firms struggle with compliance. There is a plethora of unanswered compliance questions that generally start with the firm registration process, and continue through ongoing compliance and audits and examinations. Regulatory agencies generally don’t spend much time and energy trying to make things “easier” for firms. Oftentimes, it’s difficult to get in touch with regulators, and when firms are finally able to reach someone at the office, it’s next to impossible to get a simple “yes or no” answer from them. That means that compliance processes that are already unfamiliar are further complicated by the inability to find adequate support from the jurisdiction that is in charge of reviewing and approving compliance items. Enter: the compliance consultant.
For the aforementioned reasons, a vast majority of firms will find it necessary to acquire the services of a compliance consultant, or an outside entity that provides expert compliance advise in a professional capacity. The process of selecting a compliance consultant should not be taken lightly, as your choice may have a significant impact on your business both financially, and operationally. Here are a few things to think about when going through this process.
Cost vs. Benefits
Usually, one of the first things on our minds when choosing to work with anyone, on anything, is “how much is this going to cost me”? That’s completely normal. However, with compliance services, “what you get” should be equally considered along with “what you pay”. If the service acquired is initial firm registration, take a moment to check the state or SEC’s website to find out which documents will be needed to complete your registration and to get your firm up and running. At the very least, ask the compliance consultant you are considering hiring for an itemized list of documents that will be provided, so that you can fully understand what services are being offered. Far too often, a firm will pay for initial firm registration, only to find that they are still in need of additional documents after their registration is completed.
Also along this topic: how the compliance consultant will handle ongoing compliance (if at all). After your firm is registered, some compliance consultants will charge hourly for ongoing compliance, while others may have an ongoing monthly fee. Some consultants may offer services “a la carte,” while others may have predefined packages of services that are available for purchase. It is advisable that firm owners evaluate their business closely, as it pertains to the services that they will need on an ongoing basis, and communicate with prospective providers to create the most cost-effective strategy to remain compliant.
Professional Considerations (Primary Focus of Business)
Some firm owners immediately assume they need an attorney to draft their compliance documents and to register their firm. There is absolutely nothing wrong with seeking legal counsel when starting a business. In fact, it is advisable that firms seek legal counsel in the early stages of the process. However, in many cases, the attorney’s primary focus of business is not RIA compliance and this shows in the drafting and execution of the firm’s compliance documents. In addition, there is a good chance that fees leveraged by professionals that offer services other than RIA compliance will be higher than those of consultants who are narrowly focused on RIA compliance. This is generally the case in any professional relationship in which the service provider is operating outside of their normal course of business. So the takeaway here is to make sure the compliance consultant who is chosen specializes in RIA compliance. This will help cut costs as well as increase the extent to which your compliance program gets a complete set of documents.
Access to Documents
Some compliance consultants may use their access to the firm’s documents as a way to maintain their relationship with the firm. In other words, if a firm has to go through the compliance provider for all document edits, then the firm is stuck with that compliance provider unless they pay an additional fee to receive editable copies of their documents. So, when considering compliance consultants, make sure that it is clear which party owns the documents to the extent that editable copies can be obtained without additional fees being leveraged. It is advisable that compliance officers maintain editable copies of all documents in an easily accessible location, so that edits can be made seamlessly, and as often as needed.
Areas of Specialization
Areas of specialization is one of the more challenging items to uncover about this topic because it involves digging into the internal organizational structure and priorities of the compliance consulting firm. However, if the correct questions are posed, taking the time to evaluate areas of specialization can go a long way towards creating the most cost effective and useful relationship possible. Think of this topic in terms of 3 main “types” of firms serviced by the consultant; compliance consultants who specialize in working with broker dealers, SEC-registered RIAs, and/or state-registered RIAs.
A compliance consultant who has 80% of their business with broker dealers is probably not the best fit for state-registered fee-only firms. In this instance, it’s safe to assume that most of the resources the consultant reinvests in the business will be geared towards FINRA-registered broker dealers, leaving a smaller allocation for the population that makes up the minority of the consulting firm’s clients. While there is more room for overlap between state and SEC-registered firms, there still tends to be a focus on the larger firms from the perspective of the compliance consultant. Why? Simply put, SEC-registered firms have more revenue, and therefore can afford to pay for more services. Also, larger firms tend to have more compliance concerns which leads to more revenue for the compliance consultant. Therefore, there can be a natural prioritization of services provided to the larger firms. Preferably, firms will find a relationship with a compliance consultant who specializes in compliance matters for firms of a similar size and registration type.
About The Author
Scott is a licensed Securities Principal with experience in both RIA and broker-dealer compliance. He began his financial services career in 2006 as a Registered Representative with E*Trade Financial in Alpharetta, GA. He has also worked with J.P. Morgan Private Banking in Chicago, IL and with Wells Fargo Advisors in Chapel Hill, NC.
Scott’s most recent role before joining Team XYPN was as Compliance Officer of Carolinas Investment Consulting, in Charlotte NC. He’s a graduate of The University of North Carolina at Chapel Hill and holds FINRA Series 63, 65, 24, 4 and 53 Licenses.
Scott lives in Charlotte NC with his wife Meredith, and their two Sons Tyson and Jackson. In his free time, Scott enjoys watching sports, exercising, and operating the charitable organization he created upon his father’s passing.