Preparing Your Firm to Outsource Compliance

Starting a business is like drinking from a fire hose. There are so many new concepts, processes, and tasks that need to be completed, that the entrepreneur can often feel overwhelmed. One of the primary sources of anxiety for business owners is the feeling that “you don’t know what you don’t know.” To take it a step further, entrepreneurs also often don’t know how what they don’t know will create obstacles to the growth and security of their business.

From here, we can dig deeper into the decisions business owners make as it pertains to how they will spend their time. There are two primary ways to approach unknown business ownership competencies.

1. Take the time to learn.
2. Pay someone else who knows how to do it.

Many new business owners lack the cash flow to pay a staff of professionals to operate as technicians in various areas of subject matter expertise. As a result, there is usually a blended approach to fulfilling the needs of the business. The entrepreneur will usually handle a portion of the tasks themselves and then outsource other areas of business management. When this is the case, how do entrepreneurs decide which jobs to take on and which to delegate?

This decision is usually made based on the need to establish the identity of the business. The public-facing elements of the company take precedent over back-office functionality. As a result, business owners are more likely to dedicate time and resources towards marketing, establishing their niche, and solidifying their brand identity. Back-office functions that do not directly contribute to the growth of the business, such as operations, accounting, and compliance, generally take a back seat. It’s important to remember that Registered Investment Advisors operate under strict regulatory environments, so back-office functions can only be sidelined for a limited period before the neglected tasks present tangible threats to the firm. Therefore, the time comes in every growing firm’s journey, where it’s time to “pay someone else who knows how to do it.”

When it’s time to outsource compliance operations, adequate preparation significantly minimizes cost and creates the opportunity for a smooth transition of processes. Here are the steps to prepare your firm to outsource compliance operations.

1. Consolidate custodial relationships

One of the most cumbersome elements of ongoing compliance is reporting. Firms are required to maintain a tremendous amount of documentation as a part of their books and records requirement. Much of that documentation comes from the firm’s custodian(s) in the form of reports. Most specifically, trading, portfolio management, and client money movement transaction data are downloaded, reviewed, and archived from custodians. For firms with one custodian, there is only one location where all reporting is executed. With each additional custodian, the supervisor must implement a new set of processes to gather reports that are required for supervision. Leveraging multiple custodians increases the cost of an outsourced compliance arrangement. If possible, select a “primary” custodian and start to consolidate all of your client relationships towards that custodian.

2. Maintain your data internally

The use of third-party tech vendors is a necessity for today’s RIA. Books and records requirements stipulate that firms must maintain records for a period of 5 years. The inability to retrieve data from third-party vendors is not an acceptable excuse for firms to find themselves unable to present required documentation in an examination. Leveraging tech vendors brings about the concern that advisers may be too heavily reliant on third-party vendors for the maintenance of books and records. The fewer the locations of firm records, the easier it is for an outsourced compliance service provider to begin the process of internally organizing files for periodic testing and exam preparation.

3. Update your Critical Contact List

Whether as a part of the firm’s business continuity plan or pursuant to the firm’s Cybersecurity or third-party vendor due to diligence process, each firm is advised to maintain a critical contact list. This is a consolidated list of firm contacts that are vital to the firm’s business operations. The critical contact list can serve as an excellent reference for compliance service providers to determine what access is needed to perform ongoing supervision based on the firm’s business operations.

4. Clean your CRM

Most RIAs use Customer Relationship Management software to manage their client relationships. However, many firms do not specifically configure their CRM to run reports that compliance uses to conduct ongoing supervision. Compliance supervision requires access to accurate client lists, including reporting on other organizational items such as services that clients are utilizing, contract dates, and client termination dates. Firm CRM is also where notes of client conversations are usually maintained. These notes are critical for compliance to establish the extent to which client recommendations are being consistently documented and are being accurately implemented by the adviser. Maintaining current CRM data fosters more efficient transitions to ongoing outsourced compliance relationships.

5. Establish your budget

There is a distinct difference between compliance consulting services and outsourced compliance. Consulting services are primarily designed to “teach” Chief Compliance Officers how to become effective compliance supervisors and to provide support for critical items to minimize risk. Outsourced compliance services are designed to “do” compliance for the firm to free up time for the firm owner or adviser to spend more time working with their clients. Ongoing compliance tasks are time-consuming and tedious, which is why most advisers don’t want to deal with them. As a result, legitimate outsourced compliance solutions are substantially more highly-priced than standard consulting services. Firms are wise to begin evaluating the cost of hiring a new employee in comparison to the fees associated with outsourced compliance solutions.

Small to mid-sized firm owners who are motivated to learn about compliance can benefit from consulting relationships designed to educate and support. Large firm owners that have the resources to hire internally are best served to recruit and retain a full-time compliance officer. Outsourced compliance solutions are most suitable for growing firms that are in between launch and hiring internally.

These materials have not been reviewed or approved by any regulatory agency, and represent solely the interpretative opinions of Synergy Compliance Education (“Synergy”). To the fullest extent permissible pursuant to applicable laws, Synergy disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. In no event shall Synergy have any liability for damages, losses, and causes of action for accessing these materials.